The categorization rules introduced in 2018 brought significant structure to the mutual fund industry. At that time, several fund houses were operating multiple similar schemes, which created confusion for investors and made it difficult to compare products. SEBI addressed this by permitting only one scheme per category, which reduced duplication and increased transparency.
As the mutual fund industry expanded and investor
participation grew between 2020 and 2025, these fixed categories began to limit
flexibility. There was a need for clearer scheme definitions, more precise
communication, and stronger safeguards against product overlap. The 2026
framework has been introduced to refine the system and better align scheme
characteristics with investor expectations.
1. Clearer and More Transparent Debt Fund Terminology
Earlier, debt fund categories used terms such as “Low
Duration,” “Medium Duration,” or “Credit Risk,” which did not always provide a
clear understanding of the underlying portfolio. In some cases, the maturity
structure of these funds varied significantly depending on market conditions or
the fund manager’s strategy.
New Approach
- The
term “Duration” has been replaced with “Term”, which is more precise and
easier for investors to understand.
- Funds
must now include the indicative maturity range directly in the scheme
label.
Example:
- Previous
label: Medium Duration Fund
- Revised
label: Medium Term Fund (3–4 Years)
This change helps investors assess the intended holding
period more accurately and reduces ambiguity in product positioning.
2. Restrictions on Portfolio Overlap to Prevent Lookalike
Schemes
A key concern under the earlier framework was the existence
of multiple thematic or sectoral funds within the same fund house that held
highly similar portfolios. For example, two differently named
technology-related schemes could have more than 70–80% of the same stocks,
limiting the diversification benefit for investors.
New Rule
- Fund
houses must ensure that the portfolio overlap between two schemes in the
same thematic or sectoral category does not exceed 50%.
- Any
new fund launch must demonstrate meaningful differentiation in terms of
stock selection and strategy.
This requirement ensures that each scheme represents a
distinct product and reduces the risk of unintentional concentration for
investors holding multiple funds from the same AMC.
3. Expanded Flexibility in Value and Contra Categories
Under the 2018 rules, fund houses were restricted to
offering either a Value Fund or a Contra Fund, but not both. This limitation
did not fully reflect the differences between the two investment styles.
Revised Provision
- AMCs
may now launch both Value and Contra funds.
- They
must maintain a maximum 50% portfolio overlap between the two strategies.
This update acknowledges the distinct nature of value
investing and contrarian investing, while ensuring the uniqueness of each
product.
4. Improvements in the “Other” Categories
A. Clear Categorization for Fund of Funds (FoFs)
Earlier, Multi-Asset FoFs combined multiple strategies
without clearly distinguishing whether the underlying funds were active or
passive. This sometimes added unnecessary complexity and made it harder for
investors to understand cost structures.
New Requirement:
Multi-Asset FoFs must be classified as one of the following:
- Active-only
FoF
- Passive-only
FoF
- Omni
FoF (a combination of active and passive underlying funds)
This brings transparency to the investment approach and the
fee structure.
B. Enhanced Structure for Solution‑Oriented Funds
Solution-oriented funds, such as retirement or goal-based
products, previously lacked a systematic mechanism to adjust risk as investors
approached their target dates.
Updated Provision:
- Introduction
of Target Date Funds with lock-in periods of 3, 5, or 10 years.
- The
asset allocation automatically becomes more conservative as the target
date nears.
This structure provides a more disciplined, lifecycle-based
investment path for long-term goals.
Conclusion
The 2026 mutual fund categorization changes strengthen
clarity, reduce duplication, and align scheme characteristics more closely with
investor needs. The updated framework improves communication through precise
labels, limits portfolio overlap across thematic schemes, expands strategy
options in value and contra categories, and enhances transparency in FoFs and
solution-based products. Overall, the revised rules aim to create a more
efficient, transparent, and investor‑focused mutual fund ecosystem.
SEBI Circular link: https://www.sebi.gov.in/legal/circulars/feb-2026/categorization-and-rationalization-of-mutual-fund-schemes_99983.html
