The markets regulator, Sebi, on Thursday announced the discontinuation of the solution-oriented scheme category, which includes children’s and retirement funds. It also unveiled an overhaul of mutual fund categorisation rules.
According to the regulator, the solution-oriented category stands discontinued from the date of the circular, and existing schemes under this segment will stop accepting fresh subscriptions with immediate effect. These schemes will be merged with other schemes having similar asset allocation and risk profiles, subject to prior approval from Sebi.
As of January 31, 2026 there are 15 schemes in the children’s fund category and 29 schemes in the retirement fund category.
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In July 2025, when Sebi proposed to review the categorisation of mutual fund schemes to improve clarity, introduce new schemes and to address the issue of overlap in portfolios of schemes, the market regulator said that in the case of solution oriented funds, mutual funds should be allowed to offer different types of schemes in the solution oriented category offering a different mix of equity and debt portion and the asset allocation stated should be appropriate for the solution oriented category scheme.
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Sebi in July 2025 further said that they should also be allowed to invest the residual portion of their solution category schemes in REITs and InvITs except for the Retirement Fund – Hybrid and Children’s Fund – Hybrid, subject to regulatory limits for this asset class.
According to the latest circular on February 26, 2026, the market regulator has introduced new categories such as contra funds and sectoral debt funds, adding goal-based life cycle funds and ordering asset managers to align existing schemes within six months and mentioned limits to launch FoFs.Equity FundsAccording to the circular, mutual funds may invest residual portions in equity, money market instruments, and other liquid instruments, gold and silver instruments as permitted by SEBI and in InvITs, subject to the ceilings laid out in MF regulations with respect to the respective asset class.
The residual portion mentioned here refers to the part of a scheme’s corpus not invested in its main, core asset classes as provided in the scheme characteristics.
Mutual funds shall be permitted to offer both Value and Contra funds, subject to the condition that the scheme portfolio overlap between the two schemes shall not be more than 50%. Further, for any scheme offering in the sectoral/thematic equity category, mutual funds shall ensure that no more than 50% of the schemes portfolios would overlap with other equity schemes in the sectoral/thematic category and other equity schemes categories except for largecap schemes.
In order to realign the portfolio in terms of the limits mentioned for sectoral and thematic funds, mutual funds must realign 35% of the excess overlap in the first year, an additional 35% in year two, and remaining 30% in year three.
The overlap condition shall be computed on a quarterly basis using the daily portfolio overlap values i.e. the average of daily portfolio overlap values over a quarter, according to the methodology given for calculating the overlap.
The existing sectoral/thematic schemes shall ensure compliance with regard to portfolio overlap limits within three years from the date of this circular. Any schemes unable to meet the portfolio overlap criteria after three years shall be mandatorily merged with other schemes as per applicable provisions.
Mutual Funds shall launch sectoral/thematic funds as per the list of sectors/themes as published and updated by AMFI in consultation with SEBI on half yearly basis.
Debt FundsWith respect to the medium term fund and medium to long term fund, the characteristics of the scheme shall remain the same under normal circumstances. However, the fund manager, in the interest of investors, may reduce the portfolio duration of the aforementioned schemes up to one year, in case he has a view on interest rate movements in light of an anticipated adverse situation
The circular further said that whenever the portfolio duration is reduced below the specified floors of 3 years and 4 years in respect of medium term fund and medium to long term fund, the AMC shall be required to record the reasons for the same with adequate justification and maintain the same for inspection.
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For this, the written justifications shall be placed before the Trustees in the subsequent Trustee meeting. Further, the Trustees shall also review the portfolio and report the same in their Half-Yearly Trustee Report to SEBI.
The sectoral debt scheme shall be offered after ensuring that there is sufficient availability of investment-grade paper in the market for the sectors in which the sectoral debt fund is offered by the respective AMC.
Mutual funds may invest the residual portion of debt category schemes in InvITs except for overnight fund, liquid fund, ultra-short duration fund, low duration fund and money market fund, subject to the ceilings laid out in MF regulations.
Hybrid FundsIn the hybrid category schemes, mutual funds may invest residual portions in InvITs (except for arbitrage funds), ETCDs, Gold ETFs and Silver ETFs, subject to the ceilings laid out in MF regulations w.r.t the respective asset class.
Life Cycle FundsLife Cycle Fund will be an open-ended fund with attributes of predetermined maturity and glide path for goal-based investing. The scheme following glide path strategy based investing across various asset classes i.e. Equity, Debt, InvITs, ETCDs, Gold & Silver ETF.
Mutual funds may launch Life Cycle Funds with a minimum tenure of five years and a maximum tenure of 30 years. Such a fund may be launched for tenures in multiple of 5 years and a maximum of 6 funds by a Mutual Fund can be active for subscription at any given point in time.
Additionally, as each fund reaches less than 1 year to maturity, such fund may be merged with the nearest maturity Life Cycle Fund with the consent from the unitholders.
For years to maturity less than 5 years, all Life Cycle Funds may take equity arbitrage exposure upto 50% in addition to the investment range specified for equity while ensuring that total investment in equity and equity-related instruments remains within 65%- 75% in such schemes.
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Further, in order to inculcate financial discipline, in life cycle funds, an exit load of 3% would be chargeable on any exit by an investor within one year of investment; an exit load of 2% within the first two years of investment, and 1% in the first three years of investment.
The Life Cycle Funds shall follow the benchmark framework as prescribed for Multi Asset Allocation Fund. Life Cycle Funds shall include the maturity date in the nomenclature of the scheme, for e.g. Life Cycle Fund 2055, Life Cycle Fund 2045, etc.
Other schemesFor 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. Words/ phrases that highlight/ emphasize only the return aspect of the scheme shall not be used in the name of the scheme.
Such changes shall not be considered as a fundamental attribute change. Existing schemes shall comply with the provisions of this circular within 6 months from its date of issuance.
Mutual funds shall disclose category-wise portfolio overlap levels i.e., equity scheme vs other equity schemes, debt scheme vs other debt schemes and hybrid vs other hybrid schemes. Such disclosure shall be published on the AMC website for investor communication on a monthly basis.
The AMC may launch schemes in each of the above mentioned categories, such as active option, passive option, and active and passive option. The circular had a number of FoF schemes permitted to the mutual funds. If the number of existing FoF schemes of a Mutual fund under any particular category is more than the number of FoFs permitted under the particular sub-category of FoF, such FoFs will be grandfathered.
Nikunj Saraf, CEO at Choice Wealth said SEBI’s new mutual fund classification rules are a meaningful step towards simplifying an industry that had become increasingly complex for retail investors. From an investor’s perspective, this is about clarity and trust. Investors will now be able to compare like-for-like products instead of navigating through multiple schemes with similar names but different mandates.
For AMCs, it means sharper product definition and disciplined alignment with stated objectives. In the long run, this move strengthens investor confidence and promotes more responsible portfolio construction across the industry, Saraf further said.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
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