Recently, SEBI released a new circular (dated February 26, 2026), titled “Categorisation and Rationalisation of Mutual Fund Schemes”. It introduces several new rules that influence equity mutual fund investors.
Some of the major reforms include:
- Equity MFs are now allowed up to 35% exposure to “alternative assets.” They may invest residual portion in equity, money market instruments, and other liquid instruments, gold and silver instruments (as permitted by the Board) and in InvITs.
- Sectoral/ Thematic equity category funds must restrict their “portfolio overlap” to up to 50% with other equity schemes in sectoral/thematic category and other equity schemes categories except for large cap scheme.
- SEBI has introduced a new mutual fund category, called “Life Cycle Funds,” which come with a target maturity.
Want to understand these SEBI’s new rules for equity funds in detail? Read this article till the end to first know about these changes and then see how they may benefit you while also creating certain challenges.
Table of Content
1. Equity MF Can Now Invest in Gold, Silver, InvITs
Under the new rules, equity mutual funds may invest residual portion in instruments (as permitted by SEBI, subject to the ceilings laid out in MF Regulations with respect to the respective asset class.)such as:
Gold instruments
Silver instrument
Infrastructure Investment Trusts (InvITs), and
Money Market & Other Liquid Instruments .
Earlier, fund managers held cash when equity markets were volatile or when “ideal” stock opportunities were limited. With this change, they can now allocate a part of the portfolio instead of remaining idle in cash.
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2. Sectoral and Thematic Funds Must Match Their Stated Theme
Another key reform is related to sectoral and thematic funds being “true to their label”. According to the new rule, a sectoral or thematic fund cannot have more than 50% of its portfolio overlapping with any other equity scheme in sectoral/thematic category and other equity schemes categories except for large cap scheme.
In the past, some sectoral funds held many of the same stocks that appeared in diversified schemes, which diluted their sector-specific identity. The SEBI's new rules for equity funds ensure that when an investor selects a sectoral or thematic fund, the portfolio truly reflects the chosen sector or theme. Existing sectoral/ thematic funds have been given three years to align their portfolios with this requirement.
Let’s understand this reform better through an example.
Example
Assume an asset management company runs two schemes:
Diversified Equity Fund
Defence Sector Fund
Calculating the Overlap
Note that the overlap is calculated based on the lower weight of common stocks present in both schemes. Suppose the stocks common to both funds are:
| Common stock | Weight in the Diversified Fund | Weight in the Defence Fund | Overlap Contribution |
| Defence Company A | 30% | 30% | 30% |
| Defence Company B | 20% | 25% | 20% |
| IT Company Y | 10% | 5% | 5% |
So, the total overlap is 55% (30% + 20% + 5%), which violates the maximum allowed overlap of 50%. To remain compliant, the fund manager must now reduce common holdings.
Realise that the above overlapping rule also applies to value funds and contra funds issued by the same AMC.
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3. Introduction of Life Cycle Funds (A New Mutual Fund Category)
The SEBI has introduced Life Cycle Funds, which come with a “target maturity” and a pre-defined “glide path”. Such schemes would invest in a combination of asset classes, including:
Equity
Debt instruments
Infrastructure Investment Trusts (InvITs)
Exchange Traded Commodity Derivatives (ETCDs), and
Gold or silver ETFs
At the beginning of the investment period, the fund may hold a higher allocation to growth assets such as equities. However, as the maturity date approaches, the portfolio may shift towards relatively stable assets such as debt instruments. Such schemes must follow the benchmark used for Multi-Asset Allocation Funds.
For more clarity, let’s study some of its major rules:
A) Fixed Maturity + Limited Launches
Life Cycle Funds must be launched with a minimum tenure of 5 years and a maximum tenure of 30 years. The tenure must be in multiples of five years, such as 5, 10, 15, 20, 25, or 30 years. Each mutual fund house can keep a maximum of six Life Cycle Funds open for subscription at a time.
B) Asset Allocation Pattern
Life Cycle Funds are “equity-oriented schemes” and must maintain total exposure to equity and equity-related instruments between 65% and 75%.
For funds that have less than five years remaining until maturity, the scheme is allowed to take “equity arbitrage” exposure of up to 50%. For those unaware, equity arbitrage involves buying and selling related equity instruments to capture price differences between markets.
C) Exit Load Structure
Life Cycle Funds impose an exit load as follows:
3% exit load if the investor exits within one year of investment
2% exit load if the investor exits within two years
1% exit load if the investor exits within three years
After three years, no exit load applies.
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Conclusion
So now you know about the latest SEBI mutual fund classification rules and reforms. As per the SEBI circular dated February 26, 2026, the regulator has introduced these changes:
Equity funds are now allowed to invest their “residual portion” in gold, silver, and InvITs.
Sectoral and thematic funds must limit portfolio overlap to 50%.
Value and contra funds are allowed with a maximum 50% portfolio overlap.
Introduction of Life Cycle Funds with a target maturity and a fixed glide path.
These changes give fund managers additional allocation flexibility and ensure that mutual fund schemes remain “true to their label”.
Disclaimer
An Investor Education and Awareness Initiative by Tata Mutual Fund.
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