SEBI Proposes New Categorisation and Rationalisation Norms for Mutual Fund Schemes

SEBI has released a draft circular dated July 18, 2025, proposing updates to mutual fund scheme categorisation and rationalisation. This includes allowing fund houses to launch a 2nd scheme within the same category, subject to specific conditions. The circular is open for public comments until August 8, 2025.

2nd Scheme Rules for Mutual Funds

An AMC may launch another scheme in the same category if the existing one is over 5 years old and has assets exceeding ₹50,000 crore. The new scheme must follow the same investment strategy, asset allocation, and expense ratio. It will require a separate Scheme Information Document. Once introduced, the existing scheme must stop accepting new investments.

Naming and Management

Both schemes must have similar names to avoid investor confusion. A separate fund manager can be appointed for the new scheme. The aim is to maintain uniformity while allowing limited expansion within categories.

To limit portfolio similarity, SEBI proposes a 50% overlap cap between Value and Contra funds in the same fund house. Overlaps in sectoral and thematic funds will also be reviewed. Monitoring will take place during new launches and on a semi-annual basis.

Scheme Naming Revisions

Debt schemes may see naming changes. “Low Duration Funds” could be renamed “Ultra Short to Short Term Funds,” and the word “Duration” may be replaced with “Term.” Schemes might also mention the expected investment horizon, such as “Medium Term Fund (3-4 years).” "To align with regulatory terminology, 'Fund' will be replaced by 'Scheme' across all categories."

Read more: Best Mid and Smallcap Mutual Funds to Watch in July 2025!

Sectoral Debt and Arbitrage Rules

Mutual funds may be permitted to launch sectoral debt schemes, provided no more than 60% of their holdings overlap with existing ones. Arbitrage funds may only invest in short-term government securities and repos. Equity Savings Schemes may need to maintain net exposure between 15% and 40%.

Conclusion

The proposed changes are part of a broader review of SEBI’s October 6, 2017, categorisation framework. The draft includes 20 proposals across equity, debt, hybrid, solution-oriented, and other scheme types. The move follows growth in mutual fund AUM and investor participation.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions. 

Mutual Fund Investments are subject to market risks, read all the related documents carefully before investing.