Sebi revamps MFs categorization rule; introduces Life Cycle Funds, scraps Solution Oriented Schemes

New Delhi: Markets regulator Sebi on Thursday came out with a revamped framework for classification of mutual fund schemes introducing Life Cycle Funds, scrapping the Solution Oriented Schemes category and tightening disclosure and overlap norms to enhance uniformity and investor protection.

The move, aimed at ensuring "true-to-label" positioning and curbing exaggerated return claims in scheme names, comes as Sebi seeks to align the regulatory architecture with the evolving mutual fund landscape and emerging opportunities across asset classes.

In its circular, Sebi has broadly classified schemes into five categories -- equity, debt, hybrid, life cycle and other schemes --  Fund of Fund Schemes and Passive Schemes such as Index Funds or ETFs (exchange traded funds).

"For easy identification by investors, in order to bring uniformity in names of schemes for a particular category across mutual funds and to ensure that schemes remain 'true to-label', the scheme name shall be the same as the scheme category," Sebi said.

"Words/ phrases that highlight/ emphasize only the return aspect of the scheme shall not be used in the name of the scheme," it added.

The "type of scheme" description in offer documents and advertisements must strictly follow Sebi's prescribed format.

Nikunj Saraf, CEO at Choice Wealth said that Sebi's new classification rules are a meaningful step towards simplifying an industry that had become increasingly complex for retail investors.

"By clearly defining categories across equity, debt, hybrid and solution-oriented funds and setting uniform asset allocation boundaries, the regulator is ensuring that schemes truly reflect what they claim to be. This reduces overlap, improves comparability and brings much-needed transparency to product positioning," he added.

As per the circular, Solution Oriented Schemes category has been discontinued with immediate effect. Existing schemes under this category would stop accepting fresh subscriptions and merge with other schemes having similar asset allocation and risk profiles, subject to Sebi's prior approval.

Further, Sebi said that foreign securities will no longer be treated as a separate asset class.

Also, the regulator introduced Life Cycle Funds as open-ended schemes with a pre-determined maturity and a glide path strategy for goal-based investing across equity, debt, InvITs, ETCDs and Gold/Silver ETFs.  Further, the allocation to equity reduces progressively as the scheme approaches maturity, while debt allocation increases.

"Life Cycle Funds can be structured across different target maturities ranging from 5 years to 30 years. This allows investors to choose a fund aligned to their retirement horizon," Niranjan Avasthi, Senior Vice President and Head of Product, Marketing, and Digital at Edelweiss Mutual Fund, posted on X.

For Index Funds and ETFs, at least 95 per cent of total assets are required to be invested in securities of the index being replicated or tracked. These will be open-ended schemes tracking a specific index.

Similarly, Fund of Funds (FoFs), whether domestic or overseas, need to invest a minimum of 95 per cent of their assets in the underlying funds. For FoFs with multiple underlying schemes, the framework issued on June 30, 2025 will apply.

Debt exposure for maturities below five years must be limited to AA and above rated instruments with residual maturity below the scheme’s target maturity.

Mutual funds are now required to disclose category-wise portfolio overlap levels such as equity vs other equity schemes, debt vs other debt schemes and hybrid vs other hybrid schemes on their websites every month.

Portfolio overlap will be calculated at the ISIN level by summing the minimum weight of each common security held between two schemes as a percentage of assets under management.

The regulator also standardizes the naming structure and limits on the number of FoFs that an asset management company (AMC) can launch across domestic, overseas, hybrid, debt, equity, commodity and thematic categories.

It prescribes clear naming conventions for active, passive and omni FoFs, including diversified, sectoral, country-specific, region-specific and domestic-and-overseas variants.

Following this circular, mutual funds will have to modify scheme nomenclature, investment objectives, strategies, benchmarks and related parameters to align with the revised categories. These changes will not be treated as fundamental attribute changes.

All existing schemes must comply within six months from the date of issuance of this circular, Sebi said.