Categorisation Review Incoming
The Securities and Exchange Board of India (SEBI) is preparing to revise the mutual fund categorisation framework. This initiative signifies the first
comprehensive review of the guidelines governing the ₹80-trillion MF industry, and it follows the introduction of these guidelines in 2017. The primary goal of this review is to mitigate instances of portfolio overlap among various schemes and to foster sustained stability within the market. According to SEBI, the framework is complete and slated for imminent release. This follows a consultation paper floated in July 2025 that proposed a comprehensive overhaul of the rules that govern how mutual fund houses devise and present their schemes. The aim was to curb the proliferation of schemes that are nearly identical across diverse categories.
Addressing Overlap Concerns
One of the key focuses of the revised framework is to address the issue of portfolio overlap. Recent interventions by SEBI, such as one in the new fund offer (NFO) of a micro-cap fund, have highlighted concerns regarding excessive overlap in portfolios. The market regulator is expected to tackle issues related to portfolio overlap through the revised framework. The intention is to curb redundant launches. Specifically, the proposal includes a 50% cap on portfolio overlap between sectoral or thematic equity schemes and other equity schemes, excluding large-cap funds. This measure aims to prevent the proliferation of near-identical schemes and to ensure that fund houses offer distinct investment options.
Industry Feedback and Goals
SEBI has been actively gathering feedback from the mutual fund industry to inform the changes. According to Manoj Kumar, executive director at SEBI, the regulator is incorporating suggestions received from industry players. The overall aim is to bring long-term stability to the market. While the complete framework may not initially be embraced by all industry participants, it is anticipated to foster long-term stability. The regulator acknowledges that its recent interventions and the forthcoming reforms are significant and, therefore, intends to implement them thoughtfully to avoid overburdening the industry at this stage. The key objective is to refine the categorisation process to align with the evolving needs of the mutual fund sector.
Potential Future Changes
Besides addressing overlap, the framework could include other changes. There's a consideration of allowing fund houses to introduce retirement fund-of-funds (FoFs) with a target maturity strategy. This move is designed to attract long-term capital, similar to pension-style investments. Additionally, asset managers overseeing schemes with assets exceeding ₹50,000 crore might be allowed to launch additional schemes within the same category to handle liquidity concerns, especially in small-cap and mid-cap segments. The classification of small-cap, mid-cap, and large-cap stocks presents a challenge; there's discussion about introducing a micro-cap category. However, a recent intervention in a micro-cap fund highlights the complexities involved in maintaining long-term feasibility and preventing regulatory issues.
