SEBI circular on -Categorization and Rationalization of Mutual Fund Schemes

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Date of Issue: 26-02-2026  
         
Issuer: SEBI

Categorization and Rationalization of Mutual Fund Schemes

Highlights of  SEBI notice dated Feb-26 -2026

Objective

• Supersedes Clause 2.6 of Master Circular (June 27, 2024).

• Aligns mutual fund scheme categories with evolving market landscape.

• Ensures uniformity, transparency & “true-to-label” schemes.

Broad Categories of Schemes

1. Equity Schemes

2. Debt Schemes

3. Hybrid Schemes

4. Life Cycle Funds

5. Other Schemes (Index Funds/ETFs, FoFs)

Key Changes – Equity Schemes

• Clear minimum investment thresholds for each category (Large Cap, Mid Cap, Small Cap, Multi Cap, Flexi Cap, etc.).

• Portfolio overlap cap:

  • Sectoral/Thematic schemes → Max 50% overlap with other schemes.

  • Value & Contra funds → Max 50% overlap between them.

• Overlap to be calculated quarterly (daily average basis).

• Existing sectoral/thematic schemes must comply within 3 years (glide path provided).

• Monthly disclosure of category-wise portfolio overlap on AMC website.

Key Changes – Debt Schemes

• Defined Macaulay Duration ranges for duration-based funds.

• Sectoral Debt Funds allowed only in specified sectors.

• Medium & Medium-to-Long Term Funds can reduce duration in adverse situations (with trustee oversight).

• Residual investments in InvITs allowed (except certain short-duration categories).

• Concept of Macaulay Duration must be disclosed at portfolio level.

Hybrid Schemes

• Defined asset allocation ranges for:

  • Conservative Hybrid

  • Balanced Hybrid (No arbitrage allowed)

  • Aggressive Hybrid

  • Dynamic Asset Allocation

  • Multi Asset Allocation

  • Arbitrage Fund

  • Equity Savings

• Residual investments in InvITs allowed (except Arbitrage funds).

Life Cycle Funds (New Structured Framework)

• Target-date funds (5–30 years maturity).

• Glide path reducing equity exposure as maturity nears.

• Maximum 6 active Life Cycle Funds per AMC at a time.

• Exit Load:

  • 3% (within 1 year)

  • 2% (within 2 years)

  • 1% (within 3 years)

• Maturity year to be part of scheme name (e.g., 2055, 2045).

Solution Oriented Schemes

• Category discontinued.

• Existing schemes to stop subscriptions immediately.

• To be merged with similar schemes (with SEBI approval).

Fund of Funds (FoF) – Standardized Framework

• Categorized into:

  • Domestic Equity FoF

  • Domestic Debt FoF

  • Hybrid FoF

  • Commodity FoF

  • Overseas FoF

  • Domestic & Overseas FoF

• Defined:

  • Nomenclature rules

  • Benchmark guidelines

  • Maximum number of FoFs per category

• Existing FoFs to be re-categorized (not treated as Fundamental Attribute Change).

Naming & True-to-Label Requirement

• Scheme name must match category.

• No return-focused words allowed in scheme name.

• “Type of scheme” must follow uniform description.

Compliance Timeline

• Circular effective immediately (26 Feb 2026).

• Existing schemes to comply within 6 months.

• Sectoral/Thematic overlap compliance within 3 years