NEW DELHI (February 26, 2026) — The Securities and Exchange Board of India (SEBI) on Thursday issued a comprehensive circular revamping the classification of mutual fund schemes. The regulator has introduced “Life Cycle Funds” as a new category whilst simultaneously discontinuing “Solution-Oriented Schemes,” which previously included children’s and retirement funds. The overhaul is designed to ensure “true-to-label” positioning and to curb exaggerated return claims, aligning the industry with evolving market opportunities and investor protection standards.
New Five-Tier Categorisation Framework
Under the revised framework, mutual fund schemes will now be broadly classified into five primary categories. This restructuring aims to provide greater clarity and reduce portfolio duplication across fund houses.
- Equity Schemes: Focused on capital appreciation through stock market investments.
- Debt Schemes: Investing in fixed-income instruments with clearly defined duration limits.
- Hybrid Schemes: Combining equity and debt to balance risk and return.
- Life Cycle Funds: A newly introduced goal-based category.
- Other Schemes: Including Index Funds, Exchange Traded Funds (ETFs), and Fund of Funds (FoFs).
Introduction of Life Cycle Funds
The “Life Cycle Fund” is defined as an open-ended scheme with a predetermined maturity and a “glide path” strategy. These funds adjust their asset allocation—across equity, debt, gold, silver, and other permitted instruments—as they approach their maturity date.
- Tenure: Mutual funds may launch these with a minimum tenure of five years and a maximum of 30 years (in multiples of five years).
- Capacity: A single fund house can have a maximum of six active Life Cycle Funds at any point in time.
- Exit Loads: To encourage financial discipline, SEBI has mandated a sliding exit load: 3% for exits within the first year, 2% within the second, and 1% within the third year.
Discontinuation of Solution-Oriented Schemes
The “Solution-Oriented” category, which previously housed 15 children’s funds and 29 retirement funds as of late January 2026, has been scrapped with immediate effect. Existing schemes in this category are required to halt fresh subscriptions and must be merged with similar schemes or realigned into other categories, subject to regulatory approval.
Tightening of Portfolio Overlap and Naming Norms
To prevent “style drift” and duplication, SEBI has introduced strict portfolio overlap limits:
- Value vs. Contra Funds: Asset managers can offer both, but the portfolio overlap between them must not exceed 50%.
- Thematic/Sectoral Funds: These schemes cannot have more than a 50% overlap with other equity categories (excluding large-cap funds).
- Naming Conventions: Scheme names must be identical to their category names. SEBI has prohibited phrases that emphasise only the return aspect, ensuring names accurately reflect the mandate.
Asset Management Companies (AMCs) have been granted six months to align their existing schemes with these new requirements, although thematic funds have a three-year window to comply with the overlap limits.
Sources
- SEBI Circular: “Revamped Framework for Categorization of Mutual Fund Schemes” (February 26, 2026)
- The Economic Times: “Sebi revamps mutual fund scheme categorisation and rationalisation rules” (February 26, 2026)
- India IPO: “Sebi’s new mutual fund framework: Life cycle funds, contra rules floated” (February 26, 2026)
- Business World: “Sebi Tightens Mutual Fund Norms; Caps Portfolio Overlap” (February 26, 2026)
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