The Securities and Exchange Board of India (Sebi) proposed significant changes to mutual fund categorization rules on Friday, with a key provision that will allow Asset Management Companies (AMCs) to launch additional schemes within existing categories once their flagship schemes cross ₹50,000 crore in assets under management (AUM).
According to data from Value Research, in the equity and hybrid schemes category, the number of actively-managed schemes with more than ₹50,000 crore-AUM stand at 13, with combined AUM of these funds accounting for over ₹9 trillion.
This marks the first major revision since the 2017 categorization framework that had standardized mutual fund schemes. The regulator has put up the draft circular for public comments until 8 August.
Permission for additional scheme
Under the proposed rules, AMCs would be permitted to launch an “additional scheme” in any existing category, subject to stringent conditions. The existing scheme must have completed more than five years of operations and accumulated AUM exceeding ₹50,000 crore.
The additional scheme must maintain similar investment objectives, strategies, and asset allocation as the original scheme, with AMCs required to issue separate scheme information documents. However, a critical aspect of the proposal mandates that upon launching the additional scheme, the existing scheme will stop accepting new subscriptions, allowing only redemptions.
“The proposal can give a slight advantage to the new investors coming in the new scheme. The new scheme—for example large-cap fund series 2—will have a lower asset size at the beginning, which can give more nimbleness to fund manager of that scheme to buy and sell stocks,” said Nirav Karkera, head of research at wealth tech plaform Fisdom.
“It should be possible for the fund manager to manage older scheme despite lack of inflows, by generating liquidity from existing portfolio of stocks and make new investments if required,” Karkera added.
Once the additional scheme is launched, the existing one will stop accepting subscriptions. Experts have a mixed view on the likely impact of this proposal.
“Existing schemes would only see outflows as inflows are stopped, which may make it difficult to manage,” said Kirtan Shah, founder of Credence Wealth.
SEBI has proposed specific safeguards, including expense ratio caps, where the total expense ratio of the additional scheme would be capped at the level last disclosed by the existing scheme on the date of the new fund offer. The nomenclature must remain consistent to prevent investor confusion, such as “Large Cap Fund (Series 1)” and “Large Cap Fund (Series 2)”.
No more than two schemes at a time
The regulator has also specified that no more than two schemes from the same category can exist simultaneously, with AMCs having the option to merge schemes if the original scheme’s AUM declines significantly, making operations unfeasible.
To be sure, the consultation paper proposes merging of an existing scheme with the new scheme “if there is a significant decline in the AUM of the existing scheme, making it operationally unfeasible or necessitating transitional adjustments for effective management. AMC shall ensure that no more than 2 scheme exists in the same category at any point in time”.
The proposal has drawn criticism from industry insiders, who warn of potential adverse consequences for existing investors. A senior industry spokesperson, speaking to Mint on the condition of anonymity, raised significant concerns about the framework’s implementation.
“…Larger AMCs may use it as a loophole,” the spokesperson said. “It is also detrimental to existing investors because suppose there is a ₹50,000 crore scheme and the AMC launches another scheme like Large Cap Scheme 2, version 2, and the first scheme will be closed for subscription, there will only be outflows allowed.”
The consultation paper also proposes significant restrictions on arbitrage funds, limiting their debt exposure to government securities with maturity of less than one year and repos of government bonds only. This represents a notable departure from current practices, where arbitrage funds had broader debt investment flexibility.
“The restriction on arbitrage schemes to holding g-secs of maximum one year-maturity can impact returns,” said another executive of a fund house, requesting anonymity.
“Arbitrage funds can invest only in g-secs and all, which is very contradictory because in any case, money is not coming in debt,” the spokesperson said, adding that there was at least some money coming in the market through arbitrage. “And there also, you stop it. So how will the bond market survive; how will it become more liquid because mutual funds’ participation in the bond market is reducing day by day.”
Overlap limit proposed
The draft circular introduces a 50% portfolio overlap limit for schemes within sectoral/thematic and equity categories, excluding large cap schemes. This measure aims to ensure adequate differentiation between schemes and prevent AMCs from offering near-identical products under different names.
For value and contra funds, the AMCs would be permitted to offer both categories provided the portfolio overlap doesn’t exceed 50%, with monitoring required at NFO deployment and subsequently on a semi-annual basis.
“Introducing Target Date Retirement Fund of Funds is a progressive step, especially as retirement investing is poised to become a significant theme in India over the coming decades. These funds enable lifecycle-based investing, with automatic asset allocation that adjusts as an individual moves closer to retirement,” said Radhika Gupta, managing director and chief executive officer of Edelweiss MF.
This move of Sebi comes in the wake of the mutual fund industry witnessing robust growth since the 2017 framework implementation – AUMs and investor participation have expanded, and new investment avenues such as REITs and InvITs have opened up.
The regulator noted that feedback from the industry and the Association of Mutual Funds in India (Amfi) indicated a need for greater flexibility to permit product innovation while maintaining investor protection.
According to Amfi data, several major fund categories have accumulated substantial AUM: value/contra category AUM stands at ₹2.03 trillion, arbitrage fund category AUM at ₹2.49 trillion, medium-term fund category AUM at ₹25,335 crore, and medium- to long-term fund category AUM at ₹11,852 crore (as of 30 June 2025).
The consultation paper addresses scheme proliferation concerns, while attempting to balance AMC operational flexibility with investor protection. However, the industry’s mixed response suggests the final framework may require further refinement to address potential unintended consequences for existing investors and market liquidity.
The regulator has structured the feedback process through an online web-based form, encouraging all stakeholders, including investors, AMCs, and industry bodies to share their perspectives on the proposed reforms. The final framework will be shaped by the feedback received, potentially marking another significant evolution in Indian mutual fund regulation.
