SEBI’s Changes in Mutual Fund Categorization and Rationalization

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SEBI has issued a new circular on “Categorization and Rationalization of Mutual Fund Schemes” dated 26 February 2026, replacing the earlier scheme categorization framework in the Master Circular for Mutual Funds. The focus is on simplifying categories, reducing portfolio overlap, and ensuring schemes are true to their label so that investors find it easier to understand what they are investing in.


Big Change: Children’s & Retirement Funds Category Discontinued

The entire Solution Oriented Schemes category (which included Children’s Funds and Retirement Funds) has been discontinued with immediate effect.

  • All existing schemes in this category must stop taking new investments and SIP registrations right away.
  • These schemes will be merged into other schemes with similar asset allocation and risk profile, after SEBI’s approval.
  • As of 31 January 2026, there were 15 Children’s Fund schemes and 29 Retirement

New Scheme Buckets: 5 Broad Groups

Fund schemes that fall under this decision.

Earlier, mutual fund schemes were grouped as Equity, Debt, Hybrid, Solution Oriented, and Other Schemes. Now, SEBI has reorganised them into five buckets:

1. Equity Schemes

2. Debt Schemes

3. Hybrid Schemes

4. Life Cycle Funds

5. Other Schemes (Fund of Funds and Passive Schemes)


Life Cycle Funds – New Dedicated Group 

Life Cycle Funds are introduced as a separate group for structured, goal‑based investing (for example, long‑term goals like retirement or education). 

  • They follow a glide‑path strategy – asset allocation gradually becomes more conservative as the remaining tenure reduces – with a minimum tenure of 5 years and a maximum of 30 years. 
  • These funds will generally carry an exit load of 3% if exited in year 1, 2% in year 2, and 1% in year 3.
  • Life Cycle Funds with less than 5 years to maturity may take equity exposure up to 50% as per the circular.


Equity Funds

Higher minimum equity for certain styles

  • Now there are 13 types of equity-oriented schemes, compared to just 11 previously (thematic/sectoral funds have been separated into 2 categories) Earlier, categories like Dividend Yield, Value, Contra, and Focused were proposed with a minimum 65% equity allocation. Under the final rules, these now need a minimum 80% equity exposure, making them more clearly equity‑heavy strategies.
  • Value vs Contra: both allowed, but with limits. Mutual funds can now offer both Value and Contra funds, which was not allowed earlier. However, the portfolio overlap between the two schemes cannot be more than 50%, i.e., at least half of the portfolio must be meaningfully different.
  • Sectoral / thematic equity: tighter overlap control. Thematic/sectoral funds can be launched as per AMFI classification which will be refreshed half yearly. For sectoral/thematic schemes, the 50% overlap limit against other sectoral/thematic and equity schemes (excluding large cap schemes) This overlap will be checked quarterly using daily portfolio overlap values, and existing schemes have up to 3 years to comply. If a scheme still fails to meet these criteria after 3 years, it will be mandatorily merged with another scheme.
  • Foreign securities will not be treated as separate asset class


Debt, Hybrid and FoF

Debt Funds

  • Credit Risk Funds must invest minimum 65% in AA and below rated bonds (earlier: below AA+)
  • Floating Rate Funds may invest in fixed rate instruments synthetically converted to floating exposure via swaps/derivatives
  • SEBI has permitted Sectoral Debt Funds, but only in specific sectors: Financial Services, Energy, Infrastructure, Housing and Real Estate.

Hybrid Funds

  • For arbitrage funds, the debt part is restricted to government securities with residual maturity less than 1 year and repo in government securities only, with no InvIT exposure allowed.

  • Equity Savings Funds must maintain net equity exposure between 15- 40%

Fund of Funds (FoFs)

FoF categories have been widened from 2 earlier (Domestic & Overseas) to 6 categories now:

  • Equity FoF (Domestic)
  • Debt FoF (Domestic)
  • Hybrid FoF (Domestic)
  • Commodity FoF (Domestic)
  • Overseas FoF
  • Domestic & Overseas FoF


Key Structural Changes

  • In Equity funds, the residual portion can now include equity, money market/other liquid instruments, gold & silver instruments (as permitted), and InvITs.
  • In debt funds, the residual portion can now include InvITs, except in very short duration categories like Overnight, Liquid, Ultra‑Short and Low Duration funds
  • In hybrid schemes, the residual portion can include InvITs (except in arbitrage funds), ETCDs, Gold ETFs and Silver ETFs, within overall regulatory limits.
  • Mutual funds must now disclose category‑wise portfolio overlap levels every month on their website – for equity vs equity, debt vs debt and hybrid vs hybrid

Timelines and Treatment of Changes

Existing schemes must be aligned to the new rules within 6 months from the date of the circular.

SEBI has clarified that such alignment will not be treated as a change in the fundamental attributes of schemes.


Source: SEBI Circular No. HO/24/13/15(2)2026-IMD-RAC4/I/5764/2026





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