Sebi's new mutual fund framework: Life cycle funds, contra rules floated, goal-based investing gets boost

The Securities and Exchange Board of India (Sebi) has issued a fresh circular on 26 February 2026, overhauling mutual fund scheme categorisation and structure. The regulator’s changes introduce new categories — such as contra funds, sectoral debt funds, and goal-based Life Cycle Funds — while setting precise guidelines for scheme naming, portfolio overlap, and asset allocation.

Mutual funds must align their existing schemes with these requirements within six months, aiming to improve clarity for investors and reduce the risk of duplication across offerings. The move is expected to impact the structuring and labelling of schemes, with greater emphasis on transparency and consistency across the industry.

Value and Contra funds

Among the major developments, Sebi has stipulated that mutual funds may offer both Value and Contra funds, provided portfolio overlap between the two does not exceed 50%. For sectoral and thematic equity schemes, the overlap with other equity schemes in the same category and with other equity categories, excluding largecap schemes, cannot surpass 50%.

To ensure compliance, mutual funds are instructed to realign 35% of any excess overlap in the first year, an additional 35% in the second year, and the remaining 30% in the third year. Any schemes not meeting the criteria after three years must be mandatorily merged with others in accordance with applicable provisions.

The circular also brings clarity to scheme nomenclature, mandating that the name of a scheme must be identical to its category. The regulator prohibits the use of words or phrases that highlight or emphasise only the return aspect of a scheme name, aiming to ensure that all schemes remain “true to label”. Sebi has clarified that changes made solely to meet these naming norms will not be considered a fundamental attribute change. Asset managers have six months from the date of the circular to implement these changes for all existing schemes.

To enhance transparency for investors, mutual funds are now required to disclose the level of category-wise portfolio overlap—such as between equity schemes and other equity offerings, debt with debt, and hybrid with hybrid schemes—on their respective asset management company (AMC) websites. These disclosures must be updated monthly, providing improved visibility into portfolio similarities and helping investors make more informed choices.

Life Cycle Funds

The introduction of Life Cycle Funds is another highlight of the new regulations. These open-ended funds are designed for goal-based investing and feature predetermined maturities and glide paths across equity, debt, Infrastructure Investment Trusts (InvITs), Exchange-Traded Commodity Derivatives (ETCDs), and Gold & Silver ETFs. Life Cycle Funds may be launched with a tenure of five to thirty years, in multiples of five, and asset managers can maintain up to six active such funds for subscription at any given time. If a fund has less than one year to maturity, it must be merged with the nearest maturity Life Cycle Fund, subject to unitholder consent.

The revised rules detail specific asset allocation limits for various fund categories. In equity funds, the residual portion of a scheme’s corpus, not invested in its core classes, may be allocated to equity, money market instruments, gold and silver, and permitted InvITs, subject to existing regulatory ceilings. For debt schemes, the residual portion can be invested in InvITs except for overnight, liquid, ultra-short, low duration, and money market funds. In hybrid funds, residuals may be allocated to InvITs (excluding arbitrage funds), ETCDs, and Gold and Silver ETFs, always within asset class limits.

To foster financial discipline among investors in Life Cycle Funds, Sebi has introduced a tiered exit load structure: a 3% charge applies to withdrawals within the first year, 2% in the second year, and 1% in the third year of investment. These funds will follow the benchmark framework prescribed for Multi Asset Allocation Funds, and scheme names must include their maturity year, such as Life Cycle Fund 2045. For maturities under five years, Life Cycle Funds may take equity arbitrage exposure of up to 50%, provided the total equity and related investments remain within 65%-75%.

Sectoral debt funds

The new circular also introduces sectoral debt funds, which asset managers may offer only if there is adequate availability of investment-grade paper in the targeted sector. For medium-term and medium-to-long-term debt funds, the fund manager may reduce the portfolio duration by up to one year in anticipation of adverse interest rate movements, but must document and justify any deviation below the minimal portfolio duration floors of three and four years, respectively, for Sebi’s inspection.

Finally, mutual funds must seek approval from their Trustees for asset allocations in solution-oriented funds, which are allowed to offer different mixes of equity and debt. Written justifications must be submitted to the Trustees at the subsequent meeting, and the portfolios must be reviewed and reported in the half-yearly Trustee Report to Sebi. Sectoral/thematic funds must correspond to sectors or themes published by the Association of Mutual Funds in India (AMFI), updated every six months in consultation with Sebi. As of 31 January 2026, there are 15 children’s fund schemes and 29 retirement fund schemes.