Market regulator Securities and Exchange Board of India (SEBI) has unveiled a sweeping overhaul of the mutual fund categorisation framework, introducing a new “Life Cycle Fund” category, scrapping solution-oriented schemes and imposing strict portfolio overlap limits to curb duplication across schemes.

The regulator has superseded its 2017 categorisation circular and aligned all scheme structures under five broad heads, Equity, Debt, Hybrid, Life Cycle Funds and Others (including Index Funds/ETFs and Fund of Funds). Existing schemes have been given six months to comply, and the resulting changes in nomenclature, investment objective and benchmarks will not be treated as fundamental attribute changes.

To address concerns around ‘closet indexing’ and scheme duplication, SEBI has introduced a 50 percent portfolio overlap cap for sectoral and thematic equity schemes compared to other equity schemes (except large-cap funds). The overlap will be calculated quarterly based on daily holdings data, with a three-year glide path for compliance. Schemes failing to meet the criteria will be mandatorily merged. Further, mutual funds will now have to disclose category-wise portfolio overlap levels on their websites on a monthly basis, enhancing transparency for investors.

In naming norms, SEBI has mandated uniform scheme names aligned strictly with their respective categories and barred the use of words that emphasise only return potential. The move aims to ensure schemes remain ‘true to label’.

Also, in another major structural shift, SEBI has introduced Life Cycle Funds, open-ended, target-maturity products with a glide-path asset allocation strategy. These funds can have tenures ranging from 5 to 30 years, with equity exposure reducing as the scheme approaches maturity. Each asset management company (AMC) can have a maximum of six such funds open for subscription at any point. These schemes will carry graded exit loads of 3 percent if redeemed within one year, 2 percent within two years and 1 percent within three years.

The regulator has also discontinued the solution-oriented category with immediate effect. Existing retirement and children’s schemes under this bucket must stop fresh subscriptions and be merged with similar schemes after obtaining SEBI’s approval. SEBI circular stated, “Existing schemes in this category shall stop all subscriptions with immediate effect. Such schemes shall be merged with any other scheme having similar asset allocation and risk profile with prior approval from SEBI”.

SEBI has also allowed AMCs to have contra and value both type of funds subject to the oveall overlap of not more than 30 percent. Circualr stated that mutual Funds shall be permitted to offer both Value and Contra funds subject to the condition that scheme portfolio overlap between the two schemes shall not be more than 50 percent.  SEBI has also allowed sectoral funds under the debt equity schemes like equity. Equity funds have now been allowed to hold small portions of gold, silver, REITs and InvITS to manage liquidity in a better way.

Among other changes, foreign securities will no longer be treated as a separate asset class, and residual investments across categories have been clarified. The circular also standardises the framework for Fund of Funds, including limits on the number of FoFs an AMC can launch per category.

The approval is subject to compliance with the provisions of the Banking Regulation Act, 1949, the Reserve Bank of India (Commercial Banks '? Acquisition and Holding of Shares or Voting Rights) Directions, 2025 dated November 28, 2025, as amended from time to time, the Foreign Exchange Management Act, 1999, and regulations issued by the Securities and Exchange Board of India, among other applicable statutes and guidelines, the bank said.

The RBI has stipulated that if the applicant fails to acquire the major shareholding within one year from the date of its letter, the approval will stand cancelled, the filing said.