I have a piece with Manas Dhagat and Pranjal Kinjawadekar in today’s Financial Express on SEBI’s proposed changes to the mutual fund regulatory architecture. It is a mixed bag with several positive recommendations. The full piece is as below:
In 2017, the Securities and Exchange Board of India (SEBI) introduced a scheme categorisation framework that transformed the mutual fund landscape. Prior to this, mutual fund houses operated with significant discretion in naming and structuring schemes. It was common to find multiple schemes within the same fund house following near-identical investment strategies but marketed under different names. For instance, titles like “Equity Growth Fund,” “Premier Equity,” or “Opportunity Fund” often masked portfolios heavily tilted toward large-cap stocks.
For retail investors, the result was a heightened sense of confusion. Many found it difficult to differentiate between schemes or evaluate their relative performance. Without clear parameters, comparison across AMCs became a challenge, and investors were often left to navigate a cluttered and inconsistent product universe, which incentivised old wine in new bottle.
SEBI’s 2017 circular sought to address this by introducing 36 distinct scheme categories. These were grouped under five broad heads: equity, debt, hybrid, solution-oriented, and others. Each AMC was permitted to offer only one open-ended scheme per category, with certain exceptions. This measure was aimed at eliminating duplication and improving comparability for investors.
SEBI has taken a step further in its regulatory efforts. On July 18, 2025, it released a Consultation Paper proposing a new round of reforms aimed at revisiting and rationalising mutual fund categorisation, through a Draft Circular. The Draft Circular introduces structural shifts in how AMCs design, govern, and differentiate their offerings.
India’s mutual fund industry today manages over ₹70 lakh crore in assets, underpinned by strong SIP flows and growing retail participation. Over time, this has led to a proliferation of schemes, some meaningfully different, others separated largely by branding. For example, a single AMC may have simultaneously run a “Growth Opportunities Fund” and a “Top 100 Equity Fund,” both tracking similar large-cap benchmarks and holding overlapping stocks.This proliferation has complicated investor choice and clouded comparability. The Draft Circular proposes to introduce clear limits to avoid similar portfolios.
A key proposal is the cap on portfolio overlap between schemes. For certain categories, particularly Value vs Contra funds, and thematic or sectoral equity schemes, the circular proposes a maximum overlap of 50%. The impact is not just procedural. Portfolio decisions can no longer be guided purely by investment logic; they must also pass through regulatory filters. If an AMC operates both a “Value Fund” and a “Contra Fund”, the two must now remain genuinely distinct in holdings. For instance, if both funds hold large stakes in PSU banks or IT companies, that may push overlap beyond permitted levels, requiring rebalancing even when investment rationale remains intact. This may require rebalancing purely for regulatory compliance, challenging traditional portfolio management processes. If these proposals are accepted, AMCs will need systems that detect and respond to such shifts proactively.
In parallel, SEBI is proposing a series of naming conventions to enhance investor understanding. Terms like “Low Duration Fund” would be replaced with clearer alternatives such as “Ultra Short to Short Term Fund.” Duration ranges like “1–3 years” or “4–7 years” would also be reflected directly in the scheme name. Further, SEBI suggests that all references to “Fund” be replaced with “Scheme”.
While this might seem cosmetic, it goes to the heart of investor making sense of complexity.A retail investor may mistakenly believe that an “Income Fund” offers guaranteed returns. Calling it a “Debt Scheme – 3 to 4 Year Term” conveys a more accurate picture of risk and duration. AMCs will be expected to update marketing material, distributor communication, and investor disclosures accordingly.
However, one of the most contentious provisions in the draft circular is SEBI’s proposal to allow an AMC to launch a second scheme in the same category if the existing scheme is over five years old and has an AUM exceeding ₹50,000 crore. This proposal raises certainconcerns as it may dilute the clarity the framework seeks to uphold.
Investment limits for stocks and sectors apply strictly at the scheme level, not the AMC level, to ensure funds remain “true-to-label”. Therefore, a new scheme does not expand an AMC’s investible universe. Instead, the proposal introduces a parallel product that could potentially cannibalize the original scheme, as it requires the existing scheme to be closed to fresh subscriptions upon the launch of the new one.
This raises operational questions. Would SIPs in the existing scheme continue? What happens to systematic transfer plans (STPs)? In practice, the original scheme could be reduced to a redemption-only vehicle, with little incentive for the AMC to maintain active management. The fear is that fund houses may shift focus and resources to the newer scheme, leaving the old scheme orphaned. Such duplication may thus return in a more formalised and sanctioned form under this clause.
On the operations side, AMCs will now need to build systems not just to track performance and compliance, but to assess portfolio similarity across schemes and flag breach risks. Investment ideation and security allocation will need to incorporate overlap considerations. For example, if an AMC’s Value Fund and Contra Fund are running close to the proposed 50% portfolio overlap limit, popular stock ideas like NTPC or telecom majors may need to be allocated preferentially to only one of them. Portfolio construction will increasingly require collaboration between fund managers, compliance teams, and investment committees.
To SEBI’s credit, the draft circular also opens the door to purposeful innovation. Lifecycle Funds with goal-based tenures for retirement, housing, or education are proposed, with glide-path investing models. Sectoral debt funds, REITs, and InvIT-linked exposures are being rationalised within hybrid funds and debt funds, subject to regulatory caps. These are progressive moves that cater to portfolio diversification needs. However, innovation must not come at the cost of governance. Sectoral debt funds must not have more than 60% overlap with other schemes, and sufficient availability of investment-grade securities in the chosen sector before launch. This prevents thematic debt schemes from becoming packaging gimmicks in thin markets.
As the industry reviews the draft and submits feedback, there is hope that the final outcome upholds the spirit of reform without reopening the door to old habits in new packaging.
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