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The Securities and Exchange Board of India (SEBI) has recently proposed a review of the categorisation of mutual fund schemes. The main objective is to enhance transparency for investors, reduce portfolio overlap (i.e., similarity) among similar schemes, and create a coherent investment environment in the market. However, many schemes have very similar portfolios. It confuses investors and fails to achieve proper diversification.
In this proposal, SEBI has proposed several important changes, such as allowing limited overlap between value and contra funds, monitoring overlap while launching new schemes, and guidelines for timely portfolio rebalancing. SEBI has also suggested some terminological changes, such as replacing the word ‘Duration’ with ‘Term’ and clarifying the terms of each scheme.
In this article, we will discuss the key changes proposed by SEBI, their impact on various sectors, and how professional bodies can adapt to these regulatory changes.
Have a look at the significant changes proposed in the Mutual Fund Scheme Classification-
A. Portfolio Overlap Control in Value and Contra Funds
SEBI has proposed that mutual fund houses will be allowed to run both value and contrarian schemes. Although there will be a maximum of 50% overlap between the portfolios of these two schemes. This overlap will be mandatory to be checked before the New Fund Launch (NFO) and every six months.
The concerned Asset Management Company (AMC) will be required to rebalance the portfolio within 30 working days if the overlap exceeds the prescribed limit. An additional 30 days can be taken on approval if needed.
B. Flexibility in Residual Investment
As per the new SEBI proposal, equity-based schemes have been allowed to invest their residual (excess) portion in various asset classes. These include debt, real estate investment trusts (REITs), infrastructure investment trusts (InvITs), and gold and silver.
Similarly, debt schemes will now also be allowed to invest in REITs and InvITs within certain limits. However, some short-term schemes such as liquid funds, money market funds, or overnight funds will not be allowed to do so. This flexibility will help investors diversify their portfolios and open up more options to fund managers.
C. Change in The Naming of Debt Schemes
SEBI has proposed to use the word “Term” instead of the word “Duration” to bring transparency in the naming of debt schemes. Investors will be able to understand the investment period of the scheme more clearly now.
For example, the name of ‘Low Duration Fund’ will be changed to ‘Ultra Short to Short Term Fund’. Also, the actual tenure will be mentioned next to the name of each scheme. It will be like “Medium Term Fund (3-4 years)”. Such naming will make decision-making easier for new and retail investors.
D. Changes Related to Sectoral Debt Funds
SEBI has allowed the launch of sector-based debt funds for the first time. More than 60% of the portfolio of any sectoral scheme cannot overlap with any other sectoral or debt scheme.
Apart from this, SEBI has also emphasized that there should be sufficient investment-grade bonds or papers in the relevant sector before the launch of the fund. It will ensure genuine differentiation of the scheme and provide investors with more structured and credible fund options.
E. Reforms in Arbitrage and Hybrid Schemes
SEBI has clarified that these funds can only take debt exposure in repos backed by short-term government securities or domestic bonds.
As a result, the risks of the schemes will be largely controlled. Investment in REITs and InvITs has been permitted in the residual portion of hybrid schemes. However, this permission is not applicable in the case of ‘Dynamic Asset Allocation’ and ‘Arbitrage Funds’. These reforms will help maintain a balance between risk and return for investors.
F. New Direction in Solution-Oriented Category Schemes
SEBI has proposed that solution-oriented schemes may be introduced with target-date funds. It will have a specific lock-in period, such as 3 years, 5 years, or 10 years.
These funds will be designed for specific financial goals in life, such as buying a house, marriage, or saving for children’s education. Also, these schemes will have the option of having a flexible mix of equity and debt. It will help investors adjust their risk and return.
G. Continue the Five Main Scheme Categories
SEBI has clarified that mutual fund offerings will remain divided into five main categories as before; equity-oriented schemes, debt-oriented schemes, hybrid schemes, solution-oriented schemes, and others. These categories help investors select the right scheme as per their objectives and play a role in portfolio diversification. It will help maintain stability and consistency in the scheme classification.
SEBI’s recent proposed changes have ushered in a new era for the mutual fund industry. It emphasises transparency and portfolio diversification for investors. To keep pace with these changes, various asset management companies (AMCs), startups, and financial advisors need to make specific regulatory preparations. This is where Enterslice stands by as a reliable partner.
Enterslice assists asset management companies and financial advisors with scheme classification restructuring, investor disclosure, overlap control, and compliance reporting. They also advise on scheme documentation and investor communication updates.
We can handle the entire SEBI registration and licensing process and provide regulatory guidance for sectoral, hybrid, or solution-oriented scheme launches for new AMCs or fintech startups. They offer expert support in preparing scheme information documents, fund strategies. Our expert team is well-versed in securities laws, digital compliance, and financial services.
The new classification proposed by SEBI will make the mutual fund industry more transparent, organized, and investor-friendly. Understanding the differences between schemes will help investors make informed decisions and ensure diversity and stability in the market. Proper guidance and compliance support are essential for any AMC or financial enterprise that wants to keep pace with these changes.Be it launching a new AMC or updating an existing scheme, Enterslice offers complete support.
Contact us today to get the right guidance at the right time.
SEBI has observed that the portfolios of many mutual fund schemes are nearly identical, which is leading to confusion and increasing risks for investors. To reduce this overlap and clarify the purpose of each scheme, SEBI has proposed a new classification. It will help investors choose schemes more consciously and will maintain transparency and balance in the market.
Portfolio overlap occurs when two or more schemes hold a large number of shares of the same type or company. This reduces investment diversity and increases risk. SEBI wants each scheme to have a distinct identity, so that investors can get real diversification and are not exposed to the same type of risk repeatedly.
SEBI has proposed that an asset management company can run two types of schemes, Value and Contra, but their portfolio overlap cannot exceed 50%. This limit will be monitored every six months. If the limit is crossed, rebalancing will have to be done within 30 days, or investors will be given an exit option.
SEBI has suggested that the word ‘Duration’ be removed and ‘Term’ should be used instead, so that investors understand how long the scheme is intended to be invested. For example, the new name of ‘Low Duration Fund’ can be ‘Ultra Short to Short Term Fund’. This change will bring transparency in the name, and the actual tenure of the scheme can be easily understood.
SEBI has proposed that arbitrage schemes will be able to take debt exposure only in government-approved short-term bonds or repos backed by those bonds. In the case of hybrid schemes, residual investment in REITs and InvITs will be allowed, but dynamic asset allocation and arbitrage funds will not get this opportunity. This change will further streamline the risk management of the scheme.
These schemes are now proposed to have a ‘target date’ and a specific ‘lock-in’ period (such as 3, 5, or 10 years) so that they can be used for specific goals like buying a house, marriage, or the future of a child. Apart from this, the investor can choose the ratio of equity and debt as per their risk profile. Such funds will play an important role in personal financial planning.
The overlap of the portfolio should be checked at the time of launching a new fund offer (NFO). If there is more than 50% similarity with an existing scheme, SEBI may not approve it. Therefore, AMCs will now have to create schemes with more innovative and specific strategies. This will reduce the number of duplicate funds in the market and create diversified options for investors.
Enterslice provides professional support in SEBI registration, scheme categorization, compliance management, and regulatory reporting for mutual funds. It is proficient in various services, including new scheme launches, risk framework creation, and overlap checking, etc. Its consulting team provides legally and technically sound and effective solutions for Fintechs, NBFCs, and investment firms.
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