SEBI New Categorisation Norms for Mutual Funds, A Step Forward with Scope for Tweaks
Why in News?
The Securities and Exchange Board of India (SEBI) has released a new consultation paper revisiting the categorisation norms for mutual fund (MF) schemes. With the MF industry growing rapidly since the 2017 classification reform, SEBI now aims to address emerging challenges, including overlapping schemes and fund size issues. The paper proposes key changes to introduce new categories, regulate thematic funds, and manage risks more effectively. 
Introduction
The Indian mutual fund industry has seen tremendous growth since SEBI’s 2017 move to simplify categorisation by consolidating MFs into 36 standard categories. This regulation allowed one scheme per AMC per category and enforced clearer labeling, benefiting over 23 crore investor accounts. However, increasing investor demand and the saturation of mainstream categories have triggered a surge in thematic fund launches, raising concerns about product duplication and fund size management.
Key Issues and SEBI’s Proposals
1. Addition of New Fund Categories
SEBI proposes introducing new categories such as:
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Retirement Funds
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Children’s Funds
These will offer varying proportions of debt and equity to suit different risk appetites.
2. Broader Investment Scope for Residual Assets
All mutual funds may soon be allowed to invest their remaining (residual) assets in:
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Gold and Silver
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REITs (Real Estate Investment Trusts)
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InvITs (Infrastructure Investment Trusts)
This move is aimed at better risk management and diversification, particularly for equity and debt funds.
3. Regulation of Thematic Funds
To stop the flooding of thematic funds, SEBI now proposes:
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AMCs can only launch a new thematic fund if they guarantee that it will not overlap more than 50% with existing schemes.
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This will prevent the proliferation of cloned or vanilla mutual fund products.
4. Relaxation of One-Scheme-Per-Category Rule
SEBI may allow AMCs to launch a second scheme in a category once the existing scheme crosses ₹50,000 crore.
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The first scheme would stop accepting flows but continue to operate.
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The second scheme would charge the same fee, helping AMCs restart in saturated categories like large-cap, mid-cap, and flexi-cap funds.
However, this move raises concerns about:
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Neglect of first scheme investors
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Redemptions and confusion among retail investors
Challenges and the Way Forward
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SEBI’s attempt to prevent confusion is welcome, but the industry must ensure clarity and investor protection.
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The proposal to peg category definitions to percentile ranks, instead of static market cap ranks (top 100 for large-cap, next 150 for mid-cap), is considered a better alternative.
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Final reforms should be well-debated to avoid unintended risks, especially those related to overlapping schemes and investor redemptions.
Conclusion
SEBI’s latest proposals show a strong intent to future-proof mutual fund investing in India. By introducing more investor-specific fund options and refining category rules, SEBI is laying the groundwork for a more robust and transparent mutual fund ecosystem. However, the success of these changes will depend on how clearly they are implemented and how well they safeguard investor interests.
Q&A Section
Q1. What was the primary goal of SEBI’s 2017 mutual fund categorisation reform?
A1. To simplify mutual fund investments by consolidating schemes into 36 categories and allowing one scheme per category per AMC, ensuring transparency and reducing investor confusion.
Q2. What new fund categories has SEBI proposed in its latest paper?
A2. SEBI has proposed new categories for retirement and children’s funds, with varying equity-debt compositions to suit different investor risk profiles.
Q3. How does SEBI plan to control the excessive launch of thematic funds?
A3. By mandating that any new thematic fund must not overlap more than 50% with existing schemes in the same category, effectively curbing duplication.
Q4. What is SEBI’s proposal to address large fund size issues?
A4. SEBI may allow a second scheme to be launched in a category once the first crosses ₹50,000 crore in size. The first will stop accepting flows but continue operating.
Q5. What suggestion is made regarding the definitions of large-cap and mid-cap stocks?
A5. Instead of defining large-cap as the top 100 stocks and mid-cap as the next 150 by market cap, SEBI is advised to use percentile-based definitions for better flexibility.
