SEBI Overhauls Mutual Fund Rules New Life Cycle Funds and Stricter Category Norms
The markets regulator SEBI has announced a revamped framework for mutual fund classification. The update introduces “Life Cycle Funds,” removes the “Solution Oriented Schemes” category, and tightens rules on portfolio overlap to protect investors and ensure transparency.
This move aims to ensure that funds are “true to label,” meaning their names accurately reflect how they invest. It also seeks to stop funds from using names that make exaggerated return claims.
New Mutual Fund Categories
SEBI has now classified mutual fund schemes into five broad groups:
- Equity Schemes
- Debt Schemes
- Hybrid Schemes
- Life Cycle Funds
- Other Schemes (including Index Funds, ETFs, and Fund of Funds)
To help investors identify funds easily, SEBI mandated that the name of a scheme must match its category exactly. Additionally, fund names cannot include phrases that focus only on potential returns.
The Rise of Life Cycle Funds
The new Life Cycle Funds are open ended schemes designed for goal-based investing, such as retirement. These funds have a set maturity date and follow a “glide path” strategy. This means they start with a higher investment in equities and gradually shift toward safer debt instruments as the fund nears maturity.
These funds can have tenures ranging from 5 to 30 years. To encourage long term commitment, SEBI has set higher exit loads for early withdrawals:
- 3% if you exit within the first year
- 2% within the second year
- 1% within the third year
Discontinuing Solution Oriented Schemes
The “Solution Oriented” category which previously included specific children’s and retirement funds has been discontinued immediately. Existing schemes in this category can no longer accept new subscriptions and will eventually merge with other schemes that have similar risk profiles and asset allocations.
Stricter Rules for Passive and Sectoral Funds
For Index Funds and ETFs, at least 95% of the assets must be invested in the securities of the index they track. Similarly, Fund of Funds (FoFs) must invest at least 95% of their assets in their underlying funds.
SEBI also introduced a 50% cap on portfolio overlap for sectoral and thematic funds to prevent duplication. Mutual funds must now disclose these overlap levels on their websites every month.
Transition Timeline
Asset Management Companies (AMCs) have six months to align their existing schemes with these new rules. Changes made to comply with these naming and classification norms will not be treated as “fundamental attribute changes,” making the transition smoother for fund houses.
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