Big Shake-Up in Mutual Funds! SEBI Scraps Solution Funds, Introduces Life-Cycle Category | 5 Changes Explained

Mutual Funds Update: The Securities and Exchange Board of India, on Thursday, February 26, announced a major overhaul in the categorisation of mutual funds. The market regulator discontinued solution-oriented funds like child saving scheme and retirement fund category. Introduction of 'Life Cycle Funds' and tighter regulations for thematic funds, were among the key mutual funds changes announced by SEBI.

SEBI's mutual funds categorisation regulations, released on Thursday, are aimed at bringing clarity and improving transparency for investors while choosing from different categories of mutual funds. Here are the key changes announced by SEBI related to mutual funds.

SEBI Scraps Solution Oriented Mutual Funds

Solution-oriented mutual funds used to provide investment under two categories, ie retirement planning mutual funds and children gift mutual funds. Investment under these two categories is made with a lock-in for at lease five years, or for till the time when goal is reached. SEBI has discontinued funds under these categories.

"Solutions oriented scheme category is being discontinued w.e.f the date of the circular. Existing schemes in this category shall stop all subscriptions with immediate effect. Such schemes shall be merged with any other scheme having similar asset allocation and risk profile with prior approval from SEBI," read the SEBI circular.

Life Cycle Mutual Funds

The circular also mentions the introduction of Life Cycle mutual funds. As per the SEBI circular, Life Cycle mutual funds will be an open ended fund with attributes of predetermined maturity and glide path for goal based investing.

Schemes under this category will follow glide path strategy, which is an investment approach where the fund investment portfolio gradually shifts its asset from higher-risk equities to safer instruments as target goal or date approaches.

"Scheme following glide path strategy based investing across various asset classes i.e. Equity, Debt, InvITs, ETCDs, Gold & Silver ETF," will be included under this category.

Portfolio Overlap In Thematic Funds

SEBI has also tightened guidelines for thematic funds. Mutual fund schemes under this category select stocks of companies in industries that are linked to particular themes like infrastructure, service industries, PSUs, etc.

SEBI has mandated that thematic mutual fund schemes must ensure that no more than "50% of the schemes portfolio would overlap with other equity schemes in the category.

"Portfolio overlap is a masterstroke though operationally intense. Now the portfolio needs to be more-aligned towards the end product category rather than being a general well-diversified portfolio," stated Nitin Agrawal, CEO, Mutual Funds, InCred Money.

Sectoral Debt Funds, Contra Funds Launch

SEBI has also introduced sectoral debt funds in sectors like financial services, energy, infrastructure, housing, real estate, etc. Experts believe that the launch of this category may help deepen the overall debt market by directing flows to growth sectors.

Contra Fund category mutual fund schemes will follow a contrarian investment strategy. Minimum investment in equity and equity related instruments will be 80% of total assets.

Overlap Disclosure

The market regulator has also mandated for mutual fund houses to disclose their schemes' overlapped funds on a monthly basis.

"Mutual Funds shall disclose category wise portfolio overlap levels i.e. equity scheme vs other equity schemes, debt scheme vs other debt schemes and hybrid vs other hybrid schemes. Such disclosure shall be published on AMC website for investor communication on a monthly basis."