The Securities and Exchange Board of India (Sebi) introduced sweeping changes for the Rs 81 lakh crore mutual fund industry on Thursday. The changes include doing away with solution-oriented schemes, introduced life cycle funds, allowed more exposure to gold, silver and infrastructure investment trusts (InvITs) and restricted portfolio overlap. The aim, experts said, is to make schemes more true-to-label in their portfolio construction.
From Labelling to Reality
Mutual fund houses can no longer accept fresh funds in their solution-oriented schemes – retirement and children funds. These schemes, which have garnered around Rs 60,000 crore, will be merged with any other scheme having similar asset allocation. Said Dhirendra Kumar, CEO, Value Research, “Sebi has done something it rarely does: admitted a category was pointless and killed it. Solution-oriented funds were always a labelling exercise, and their removal is long overdue.
Importantly, fund houses can now invest up to 35% of the scheme in gold, silver, and (InvITs). Consequently, equity funds will have more options to deploy funds. Currently, they can invest in money market and other liquid securities. Industry experts believe that this will create a new source of demand for gold and silver, which have been on the boil in the past year due to global uncertainties.
An important development is the restriction on portfolio overlap – a move that industry experts believe will increase to more churn. Fund houses must ensure less than 50% portfolio overlap between all their sectoral and thematic funds and also between other equity schemes and sectoral/thematic funds.
The circular also gives the methodology to compute portfolio overlap between schemes. For scrips (shares or any other security) included in portfolio of two schemes, the overlap will be calculated as the minimum of the weights of the scrips in the two schemes in percentage form. For example, for a scrip with 10% weight in scheme A and 20% weight in scheme B, the overlap will be 10%. The total overlap between the two schemes will be the sum of all such minimum values of common scrips. “This will force fund houses to prove their schemes are genuinely different, not just creatively named,” added Kumar.
Sebi has also provided a glide path for achieving this. The excess overlap can be brought within the mentioned limits following a glide path: 35% of the excess overlap realigned within one year, an additional 35% within two years and the remaining 30% overlap realigned within three years.
“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 notification said.
Smart Allocation
An important introduction is lifecycle funds – goal-based, open-ended schemes with a target date maturity that will change their allocation across various asset classes through a glide path. These schemes can be launched with a maturity of 5, 10, 15, 20, 25 and 30 years. The permitted asset classes for investment include equity, debt, InvITs (Infrastructure Investment Trusts), ETCDs (Exchange Traded Certificate of Deposits), gold and silver ETF.
The maximum allocation to equity is capped at 50% for a 5-year maturity period, 65% for a 10-year maturity period, and 95% for maturity periods above 10 years. Further, to inculcate financial discipline among investors, lifecycle funds will levy a 3% exit load for redemptions within the first year, a 2% exit load for redemptions within the first two years, and a 1% exit load for redemptions within the first three years.
Radhika Gupta, CEO, Edelweiss Mutual Fund said on X, “…Asset allocation automatically aligns to an investor’s time horizon, gradually moving from equity to lower-risk assets as the goal nears. That reduces the need for constant decision-making, keeps investors disciplined, and does so within a tax-efficient structure.”
According to Aditya Agrawal, Co-founder of the wealth management platform Wealthy.in, the launch of lifecycle funds is a move toward more structured, goal-oriented investing with transparent asset allocation frameworks and consistent investment mandates.
There has been some relaxation given to fund houses that have Contra or Value schemes. Earlier, a fund house could provide only one of the two options. Now, they have been allowed to offer both options.
The new regulations have specified the minimum investment threshold for some categories. This includes multi cap funds where schemes must invest at least 25% of their assets in large, mid and small cap. Presently, multi cap funds are required to invest at least 75% of their assets in equity and equity related instruments with no additional constraints on investment across market caps.
The number of categories has increased to 13 types of equity-oriented schemes, compared to 11 previously. The new circular has separated thematic/sectoral funds that were clubbed together previously. The naming of ELSS schemes has also been changed.
Kumar believes that while Sebi has simplified many things, the introduction of new categories like sectoral debt funds, life cycle funds and others will provide more opportunities to launch new fund offers, thereby confusing the investor. “The question is whether two years from now we’ll have fewer, clearer choices for investors, or just more sophisticated clutter,” he added.