Mutual Fund Rules Changed, Investments Now Allowed in 40 Categories – Big Benefit for Investors

Mutual Fund Rules: Big news for Mutual Fund investors. On Thursday, the market regulator SEBI introduced stricter rules for mutual funds. These new regulations involve tightening the definitions of categories and imposing limits on portfolio overlap to ensure that schemes invest according to their designated names and avoid duplication. Thematic funds have a three-year period to comply, while other funds are given six months.

With the updated regulations from the Securities and Exchange Board of India (SEBI), the total number of mutual fund categories has risen from 36 to 40. This includes 13 equity categories, 17 debt categories, 7 hybrid categories, 2 ‘other’ categories (which encompass index funds, ETFs, and fund of funds), and 1 life cycle category. Additionally, SEBI has enforced strict limits on portfolio overlap, particularly for sectoral and thematic funds, along with more stringent rules for value and contra funds.

What changes can asset managers expect?

Asset managers are still permitted to manage both value and contra schemes; however, the overlap between these two portfolios must not exceed 50%. For thematic equity schemes, SEBI has specified that no scheme’s portfolio should overlap by more than 50% with other thematic schemes or other equity categories (with the exception of large-cap). The regulator is now focusing not only on the labels but also on the actual portfolios, ensuring that schemes invest in line with their names.

Furthermore, SEBI has standardized the method for measuring overlap. This will now be assessed quarterly, using the average of daily portfolio overlap during that timeframe. This represents a significant transition from mere labeling to clear distinctions and will help minimize duplicate funds within the same Asset Management Company (AMC). It will become increasingly challenging to manage multiple schemes with identical portfolios under different names.

Scheme naming must be chosen carefully. The regulator has also tightened scheme naming rules. Scheme names must now match their categories. Asset managers must provide monthly category-wise overlap information on their websites: equity versus equity, debt versus debt, and hybrid versus hybrid. SEBI has closed solution-oriented schemes with immediate effect. Existing schemes have been directed to stop subscriptions and merge into a similar scheme with SEBI approval. The new rules mandate a minimum 80% equity investment for dividend yield, value, and contra funds. New structures, such as life cycle funds and sectoral debt funds, have also been introduced