SEBI Updates Mutual Funds Categories With Life Cycle Funds, Ends Solution-Oriented Schemes

Securities and Exchange Board of India (SEBI) updated mutual funds categories on Thursday, February 26. The regulator removed some goal-based options and added new ones. SEBI also tightened rules for thematic products and required fresh disclosures. The changes aimed to make mutual funds choices clearer. SEBI said this helped investors compare categories with more transparency.

A key shift was the removal of solution-oriented mutual funds. These schemes earlier covered retirement planning and children gift funds. They usually carried a lock-in of at least five years. The lock-in could also last until the goal was met. SEBI said existing schemes must stop taking new money at once.

"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.

SEBI introduced Life Cycle mutual funds for goal-based investing. SEBI described them as open-ended schemes with set maturity features. These funds also use a predefined glide path. The portfolio moves from higher-risk equity to safer assets near the target date. This approach aimed to reduce risk as the goal came closer.

"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.

Thematic mutual funds: Portfolio overlap limits

SEBI tightened rules for thematic mutual funds that pick stocks linked to themes. Examples included infrastructure, service industries, and PSUs. SEBI directed that thematic schemes manage duplication with peers. The regulator set an overlap ceiling with other equity schemes. "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.

SEBI also created new categories across debt and equity styles. Sectoral debt funds can invest in areas like financial services and energy. Other sectors listed were infrastructure, housing, and real estate. SEBI also introduced contra funds using a contrarian approach. These schemes must keep at least 80% in equity instruments.

Alongside product changes, SEBI required monthly overlap reporting by mutual fund houses. Disclosures must show category-wise overlap levels for equity, debt, and hybrid schemes. The information must appear on the AMC website for investors. "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."

The updated mutual funds framework removed solution-oriented schemes, added Life Cycle funds, and tightened thematic rules. SEBI also brought in sectoral debt and contra fund categories. Regular overlap disclosures became a monthly requirement. Together, these steps reshaped how schemes were grouped and compared. SEBI said the objective stayed focused on clarity and transparency.