SEBI’s New Mutual Fund Rules 2026 Explained: Know the Latest Benefits and Challenges

Recently, SEBI has introduced several major changes to mutual fund classification rules. These are:

• Equity funds can invest their permitted residual portion in gold, silver, InvITs, money market instruments, and other liquid instruments, subject to applicable limits.
• Sectoral and thematic funds must limit “portfolio overlap” with other equity schemes to 50%, subject to specified exceptions.
• SEBI has introduced a new category of mutual funds known as Life Cycle Funds. This scheme comes with target maturity dates and a pre-defined asset allocation or “glide” path.

(Source: SEBI Circular, dated Feb 26, 2026)

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 mutual funds may invest their residual corpus in permitted gold and silver instruments, InvITs, money market instruments, and other liquid instruments, subject to applicable regulatory limits. The residual portion refers to the part of a scheme’s corpus not invested in its core asset classes, as specified in its scheme characteristics.
• 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.

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.

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:

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. 

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.

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”.

1. Will SEBI’s new mutual fund rules change my existing investments?

The new rules may lead to changes in scheme portfolios as fund houses align their investments with the revised requirements. For example, 

• Sectoral and thematic funds may adjust their stock holdings to meet the portfolio overlap limit. 

As an investor, you may review scheme disclosures and portfolio updates to assess how these changes can influence your investments.

2. Are Life Cycle Funds suitable for investors saving for retirement?

Life Cycle Funds may potentially suit investors with a long-term financial goal as they have a:

• Target maturity date 

and

• Pre-defined asset allocation or glide path

However, their allocation rules may not match every investor's risk tolerance or retirement timeline. You may assess the scheme's investment strategy, applicable costs, and exit loads before investing.

3. Can I withdraw my money from a Life Cycle Fund before its target maturity date?

You can generally redeem your units before the target maturity date, subject to the scheme's terms. However, exit loads apply during the first three years of investment as follows:

• 3% within one year
• 2% within two years, and
• 1% within three years

4. Can equity mutual funds now invest in gold and silver?

As per SEBI Master Circular (dated February 26, 2026), equity mutual fund schemes may invest their residual corpus in permitted gold and silver instruments, InvITs, money market instruments and other liquid instruments, subject to applicable regulatory limits. 

The residual portion refers to the part of a scheme’s corpus not invested in its main/ core asset classes, as specified in its scheme characteristics. The permitted allocation depends on the scheme’s investment mandate and the regulatory ceilings applicable to each asset class.

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