SEBI's New 40-Category Mutual Fund Framework: What Changed and Why It Matters

The regulator issued its circular on the Categorisation and Rationalisation of Mutual Fund Schemes on 26 February 2026, superseding the framework that had governed scheme classification for close to a decade. The changes apply across all mutual funds, asset management companies, trustee companies, and AMFI, and several provisions take effect from 1 April 2026.

The core objective is straightforward: make sure a scheme's name, category, and actual portfolio all say the same thing. Here is what has changed, and what it means for anyone holding or evaluating a mutual fund.

From 36 categories to 40

The most visible change is scale. The number of formally recognised mutual fund categories has expanded from 36 to 40, with new categories including Life Cycle Funds and Sectoral Debt Funds added to better reflect how schemes are actually being used by investors and fund houses. SEBI has retained its broader five-group classification (equity, debt, hybrid, solution-oriented, and other schemes) as the overarching structure, with the 40 categories sitting underneath it.

Higher minimum equity exposure for several categories

Several equity categories that were previously required to hold a minimum of 65% in equity must now hold at least 80%. This higher threshold applies to Dividend Yield Funds, Value Funds, Contra Funds, Focused Funds, and ELSS (tax-saving) funds. The intent is to ensure these categories stay genuinely equity-oriented rather than drifting into a more conservative allocation while still being marketed and taxed as equity funds.

Other equity categories retain more familiar structures: Large Cap funds require a minimum 80% in large-cap stocks, Mid Cap and Small Cap funds require a minimum 65% in their respective segments, Flexi Cap funds require a minimum 65% in equity with full flexibility across market capitalisations, Multi Cap funds require at least 25% each across large, mid, and small caps, and Large & Mid Cap funds require at least 35% each in large and mid caps.

One structural change worth noting: a fund house was previously permitted to offer either a Value fund or a Contra fund, but not both. Under the new rules, an AMC can offer both, provided the portfolio overlap between the two does not exceed 50%.

Stricter limits on portfolio overlap

A recurring investor complaint has been that different schemes from the same fund house, particularly in the Sectoral and Thematic space, often end up holding largely the same stocks despite having different names and different labels. SEBI has addressed this directly: Sectoral and Thematic equity schemes can now overlap by no more than 50% with other equity schemes from the same AMC, with Large Cap funds exempted from this comparison. 

Overlap is calculated quarterly using daily portfolio values, and fund houses must disclose their overlap levels on their websites every month. Existing schemes have three years to bring their overlap within this limit, after which non-compliant schemes will need to be merged with others.

A new category: Life Cycle Funds

Among the additions, Life Cycle Funds stand out as a genuinely new structure. These are open-ended schemes with a fixed target maturity date, following a glide path that starts with higher equity exposure and gradually shifts toward debt as the maturity date approaches, a structure similar in spirit to target-date funds used internationally. Tenures can range from 5 to 30 years, and a single AMC can launch a maximum of six such schemes. To discourage early redemption, these funds carry a graded exit load: 3% if redeemed within the first year, 2% within the second year, and 1% within the third year.

Solution-oriented schemes discontinued

SEBI has discontinued the Solution-Oriented category, which previously covered Retirement Funds and Children's Funds. These schemes were originally designed around specific goals, often with lock-in periods and goal-based branding, but SEBI found that many of them held portfolios largely similar to standard equity or hybrid funds, undermining the rationale for a separate category. Existing solution-oriented schemes have stopped accepting fresh subscriptions with immediate effect and will eventually be merged into other schemes with a comparable asset allocation and risk profile, subject to SEBI's approval. Investors already holding units in these schemes are not required to take any immediate action, though it is worth watching for communication from the fund house about which scheme a holding will eventually merge into.

Other changes worth knowing

A few additional provisions round out the circular. Scheme names must now align strictly with their category, and SEBI has barred naming conventions that emphasise only return potential in a way that could mislead investors about the scheme's actual risk or strategy. Equity funds are now permitted to hold small portions of gold, silver, REITs, and InvITs, primarily to manage liquidity rather than as a major allocation shift. Foreign securities will no longer be treated as a separate asset class for categorisation purposes.

What this means for existing investors

None of these changes require an existing investor to take immediate action on their own initiative. Fund houses are responsible for bringing existing schemes into compliance, whether through renaming, portfolio adjustments, or scheme mergers, within the timelines SEBI has set. That said, it is worth reviewing scheme communications over the coming months, particularly for anyone holding a Retirement Fund, a Children's Fund, a Value or Contra fund, or a Sectoral or Thematic fund, since these are the categories most directly affected by the rationalisation. Understanding what a scheme is required to hold going forward is, in the end, the entire point of this exercise: making sure the label on a fund tells you what is actually inside it.

Mutual fund investments are subject to market risks. Please read all scheme related documents carefully before investing. The regulatory changes described above are based on SEBI's circular and are subject to further clarification or amendment by the regulator.

Vijay InvestEdge Pvt. Ltd. — AMFI-registered Mutual Fund Distributor, ARN-1777.