India’s mutual fund industry has crossed a significant milestone, managing assets worth approximately $900 billion (around ₹81 lakh crore) as of early 2026 and continuing to grow rapidly. With this expansion, the Securities and Exchange Board of India (SEBI) has taken an important step to enhance clarity, transparency, and investor protection across the industry.
On February 26, 2026, SEBI issued a comprehensive circular (reference: SEBI/HO/24/13/15(2)2026-IMD-RAC4/I/5764/2026) that fundamentally overhauls mutual fund scheme categorization and rationalization framework. This represents the most significant regulatory update to mutual fund categories in several years, expanding the framework from 36 to 40 distinct categories while enforcing stricter “true-to-label” compliance, reducing portfolio overlaps between similar schemes, and introducing new investor-friendly options aligned with evolving financial planning needs.
Most of these changes take effect from April 1, 2026, providing Asset Management Companies (AMCs) adequate time to implement necessary adjustments while prioritizing transparency and investor protection in India’s rapidly maturing mutual fund market.
Why This Regulatory Overhaul Matters for Indian Investors
The fundamental goal behind this comprehensive regulatory update is clear: eliminate misleading scheme positioning, promote genuine portfolio diversification, reduce investor confusion, and better align mutual fund offerings with contemporary investor needs and global best practices.
SEBI has identified several issues in the existing framework that needed addressing:
Portfolio overlap concerns: Multiple schemes within the same AMC or across different AMCs often held substantially similar portfolios despite having different names and stated objectives, creating false diversification for investors who thought they were spreading risk by investing in multiple schemes.
Scheme naming inconsistencies: Some scheme names didn’t accurately reflect actual investment strategies or portfolios, creating unrealistic expectations and potential disappointment when performance didn’t match what the name suggested.
Redundant categories: Certain scheme categories had become obsolete or were insufficiently utilized, cluttering the framework without providing meaningful investor value.
Need for new structures: Evolving investor requirements, particularly around retirement planning and goal-based investing, necessitated new scheme structures that didn’t exist in the previous framework.
This overhaul addresses these concerns systematically, which should help everyday investors, whether in metropolitan cities or smaller towns across India, make better-informed investment decisions based on clearer information and more transparent scheme mandates, without encountering hidden surprises or misleading positioning.
Key Regulatory Changes at a Glance
Stricter Portfolio Overlap Rules
One of the most significant changes addresses the longstanding concern about portfolio similarity between schemes that are supposedly different.
New overlap restrictions effective April 1, 2026: For specific scheme categories including thematic funds, focused equity funds, value funds, and contra funds, portfolio overlap between schemes within the same AMC is now capped at 50% maximum. This means that if you invest in two different schemes from the same fund house in these categories, at least half of the portfolio must consist of different securities, ensuring you’re getting genuine diversification rather than duplicated exposure.
Enhanced transparency requirements: AMCs must now disclose portfolio overlap data monthly on their official websites starting April 1, 2026. This allows investors and advisors to verify whether multiple schemes in a portfolio genuinely provide diversification or are essentially holding similar securities.
Compliance timeline for existing schemes: Schemes that don’t currently meet the 50% overlap threshold have been given until April 1, 2029 (three years from the effective date) to either adjust their portfolios to comply, merge with similar schemes, or wind up. This extended timeline recognizes that immediate portfolio reconstruction could be disruptive and potentially disadvantageous to existing investors.
Scheme Naming and Mandate Alignment
SEBI is enforcing much stricter alignment between scheme names and actual investment strategies:
“True-to-label” requirements: Scheme names must accurately and precisely reflect the investment category, strategy, and portfolio composition. AMCs can no longer use aspirational or marketing-oriented names that suggest strategies or focuses the scheme doesn’t actually implement.
No performance implications in names: Scheme names cannot include terms that suggest or promise specific return outcomes, capital protection, or performance superiority. Names must be descriptive of strategy, not predictive of results.
Compliance timeline: AMCs have until October 1, 2026 (six months from the April 1 effective date) to rename non-compliant schemes and ensure complete alignment between scheme names, stated objectives in offer documents, and actual portfolio implementation.
This change should significantly reduce investor confusion and prevent situations where scheme names create expectations that actual portfolio strategies cannot fulfill.
Expanded Strategic Flexibility for Fund Houses
Previously, AMCs faced certain restrictions on offering multiple schemes following similar investment philosophies within specific categories.
New flexibility effective April 1, 2026: AMCs can now offer both value-oriented schemes and contra schemes simultaneously, whereas earlier regulations limited fund houses to offering just one of these strategies. This expansion recognizes that value investing and contrarian investing, while related, represent sufficiently distinct approaches to warrant separate scheme offerings.
This change provides investors with more granular choices within equity investment styles while maintaining the overall framework’s integrity through the portfolio overlap restrictions mentioned earlier.
New Mutual Fund Categories Introduced
SEBI has added two significant new categories to the mutual fund framework, both effective April 1, 2026:
Life Cycle Funds (Target Maturity Funds)
This is arguably the most significant new addition, addressing a gap in retirement and goal-based planning tools available to Indian investors.
Structure and characteristics:
- Open-ended schemes with predetermined maturity dates
- Minimum maturity period: 5 years
- Maximum maturity period: 30 years
- Follow a “glide path” strategy that automatically adjusts asset allocation over time
How the glide path works: When the fund is far from its target maturity date (say, 20-25 years away), the portfolio typically maintains higher equity allocation for growth potential. As the target date approaches, the fund systematically and automatically shifts toward higher debt allocation for capital preservation and stability.
This automatic de-risking mirrors the approach many financial planners recommend for retirement savings, aggressive growth when young with long time horizons, gradual shift toward conservation as retirement approaches, but implements it systematically within a single fund structure without requiring active investor decisions.
Investment universe: Life Cycle Funds can invest across a diversified range of asset classes including:
- Equity securities (domestic)
- Debt instruments across duration and credit spectrum
- Infrastructure Investment Trusts (InvITs)
- Exchange-Traded Commodity Derivatives (ETCDs)
- Gold ETFs
- Silver ETFs
Ideal use cases: These funds are particularly well-suited for specific goal-based planning:
- Retirement corpus building (25-30 year target funds for younger investors)
- Children’s higher education funding (15-18 year target funds)
- Major planned expenses with defined timelines
The automatic glide path removes the behavioral challenges and decision-making burden of manually rebalancing and de-risking as goals approach.
Sectoral Debt Funds
This new category provides targeted fixed-income exposure for investors seeking concentration in specific economic sectors through debt instruments.
Structure and requirements:
- Minimum 80% allocation to debt securities rated AA+ or higher from a specific designated sector as specified by SEBI
- SEBI-specified sectors: Financial Services, Energy, Infrastructure, Housing, and Real Estate (five distinct sectors)
- Remaining 20% can be allocated to other debt instruments or cash equivalents
- Provides sector-focused exposure while maintaining credit quality standards
Rationale: Some investors or advisors may want debt exposure concentrated in sectors they believe offer specific opportunities or align with particular economic themes, while maintaining high credit quality. Sectoral Debt Funds provide this focused exposure within a regulated framework with clear minimum credit standards for SEBI-specified sectors.
Risk considerations: While these funds maintain AA+ minimum ratings, sector concentration still represents additional risk compared to diversified debt funds. Economic or regulatory challenges affecting the specific sector can impact multiple holdings simultaneously. These are specialized tools appropriate for investors who understand and accept sector concentration risk.
Discontinued Categories
As part of rationalizing the framework, SEBI is discontinuing certain categories that have become less relevant or have been superseded by better alternatives.
Solution-Oriented Schemes Category Discontinued
The existing “solution-oriented schemes” category, which included retirement-focused funds and children’s benefit funds with mandatory lock-in periods, is being discontinued following SEBI’s circular issued on February 26, 2026.
Timeline and implications:
- Circular issuance date: February 26, 2026 (announcing discontinuation of the category)
- No new scheme launches: From February 26, 2026 onwards, AMCs cannot launch new solution-oriented schemes in this category
- Fresh investments (new SIPs or lump sums) in existing schemes: Not permitted after April 1, 2026
- Existing investments and units: Continue to be held until scheme reaches its stated maturity, or until the AMC implements merger or wind-up procedures
- AMC obligations: Must either:
- Merge existing solution-oriented schemes into appropriate similar schemes (subject to SEBI approval and unitholder consent following proper procedures), or
- Wind up the schemes following proper closure procedures and returning funds to unitholders
Rationale for discontinuation: The introduction of Life Cycle Funds provides a more flexible, sophisticated alternative for goal-based investing without requiring rigid lock-in periods. The mandatory lock-in structure of solution-oriented schemes, while intended to enforce investment discipline, often created liquidity constraints for investors whose personal or financial circumstances changed unexpectedly during the lock-in period.
Life Cycle Funds achieve similar goal-based allocation strategies and implement automatic de-risking through glide paths without imposing inflexible lock-in requirements, making them more suitable for contemporary investor needs while still encouraging long-term disciplined investing.
What this means for existing investors: If you currently hold solution-oriented schemes (retirement funds or children’s benefit funds), you should:
- Review your portfolio to identify any solution-oriented scheme holdings
- Monitor AMC communications regarding their specific plans for your scheme (merger proposal or wind-up timeline)
- Evaluate the proposal – assess whether the proposed merged fund or wind-up approach aligns with your original goals and current financial situation
- Consider alternatives if needed – if the AMC’s approach doesn’t suit your evolving needs, consider redeeming (once your current lock-in period completes) and reinvesting in more appropriate alternatives like Life Cycle Funds or other schemes better aligned with your current goals
Important clarification: You are not forced to immediately exit your existing solution-oriented scheme investments. Your existing units continue to be held and will either remain until stated maturity, be transitioned to a merged scheme (requiring your consent), or be returned to you if the scheme winds up. The discontinuation primarily affects new investors, they cannot enter these schemes from April 1, 2026 onwards.
Enhanced Commodity Exposure for Diversification
SEBI has significantly expanded the ability of actively managed mutual fund schemes to include gold, silver, and commodity derivative exposure, a meaningful development for portfolio diversification.
Expanded Gold and Silver Allocation
New flexibility effective April 1, 2026: Actively managed equity funds and hybrid funds (excluding arbitrage funds, which have different structures) can now allocate a portion of their residual assets (the portion not mandated to be in specific asset classes by scheme category) to:
- Gold ETFs (Exchange Traded Funds tracking gold prices)
- Silver ETFs (Exchange Traded Funds tracking silver prices)
- Exchange-Traded Commodity Derivatives (ETCDs)
This allocation is subject to ceilings specified in SEBI Mutual Fund Regulations for the respective asset class.
What this means practically: For example, a flexi-cap equity fund that must maintain minimum 65% equity for tax classification can now allocate a meaningful portion of its remaining residual assets to gold and silver ETFs or commodity derivatives, providing inflation hedging and portfolio diversification without deviating from its primary equity mandate.
Rationale for this change: Gold and silver have historically shown low correlation with equity markets and often perform well during inflationary periods or currency stress, exactly when equity portfolios might struggle. Allowing fund managers this flexibility enables better portfolio construction for managing different market environments while staying within their scheme’s primary mandate.
Shift to Domestic Gold and Silver Valuation
According to industry sources and regulatory updates associated with this overhaul, valuation of physical gold and silver holdings in mutual fund schemes and gold/silver ETFs is transitioning to be based on domestic Indian exchange spot prices rather than international London market benchmarks (like London Bullion Market Association prices) previously used.
Why this matters:
- Reduced currency risk: Domestic pricing eliminates the rupee-dollar conversion element that created additional volatility in gold fund valuations
- Better alignment: Indian investors’ actual buying/selling of gold happens in domestic markets; domestic pricing provides more relevant valuation
- Regulatory consistency: Aligns with India’s move toward developing domestic commodity markets and reducing dependence on international benchmarks
This change should make gold and silver fund valuations more stable and better reflect actual domestic market conditions rather than introducing currency fluctuation noise.
(Note: This specific valuation provision appears to be part of related SEBI amendments or Master Circular updates coordinated with the February 26, 2026 categorization circular.)
What These Changes Mean for Investors and Distributors
For Individual Investors
Enhanced clarity and transparency: The stricter naming rules and portfolio overlap disclosures make it easier to understand what you’re actually investing in and whether multiple schemes genuinely provide diversification or are substantially similar.
Better goal-based tools: Life Cycle Funds provide a more sophisticated, flexible option for retirement and education planning compared to the discontinued solution-oriented schemes. The automatic glide path removes the behavioral challenge of gradually de-risking as goals approach.
Improved diversification options: |Expanded gold and silver exposure in actively managed funds provides fund managers more tools to manage portfolio risk and potentially improve risk-adjusted returns across different market environments.
Action items if you hold solution-oriented schemes: Review your portfolio to identify any retirement or children’s benefit funds. Monitor AMC communications about restructuring plans. Evaluate whether proposed mergers align with your goals or whether moving to Life Cycle Funds or other alternatives makes more sense for your situation.
For AMFI-Registered Distributors
Enhanced advisory responsibility: With clearer scheme mandates and better transparency, distributors can more confidently explain scheme characteristics and suitability to clients without confusion about overlapping portfolios or misleading names.
Portfolio review opportunities: The discontinuation of solution-oriented schemes and introduction of Life Cycle Funds creates natural opportunities to review existing client portfolios and discuss whether newer structures better serve their long-term goals.
Compliance awareness: Stay informed about AMC actions regarding scheme restructuring, mergers, and name changes happening between April and October 2026. Proactive communication with clients about these changes demonstrates professionalism and builds trust.
Disclosure of overlaps: The monthly portfolio overlap disclosures starting April 2026 provide valuable tools for ensuring client portfolios across multiple schemes genuinely provide diversification rather than unintended concentration.
Industry-Wide Implications
Potential consolidation: Stricter rules may lead to consolidation, particularly among smaller AMCs that might find it challenging to maintain multiple schemes with genuinely differentiated portfolios while meeting the 50% overlap cap.
Quality over quantity: The framework encourages AMCs to focus on fewer, better-differentiated schemes rather than proliferating similar products with slightly different marketing positioning.
Global alignment: These changes move India’s mutual fund regulatory framework closer to global best practices around transparency, investor protection, and clear scheme mandates, appropriate for a maturing market managing nearly $900 billion in assets.
Long-term benefit: While the transition period (April 2026 through April 2029 for full compliance) might involve some portfolio adjustments and scheme restructuring, the long-term outcome should be a cleaner, more transparent, more investor-friendly mutual fund landscape.
Timeline Summary: When Changes Take Effect
February 26, 2026:
- Circular issued by SEBI
- Solution-oriented schemes category discontinued (no new schemes can be launched from this date)
April 1, 2026:
- Most regulatory changes become effective
- New categories (Life Cycle Funds, Sectoral Debt Funds) can be launched by AMCs
- Portfolio overlap caps and mandatory monthly disclosure requirements begin
- No fresh investments (new SIPs/lump sums) allowed in existing solution-oriented schemes
- Enhanced commodity exposure rules take effect (gold/silver ETFs and ETCDs in residual assets of actively managed equity/hybrid funds, subject to regulatory ceilings)
- Transition to domestic pricing for physical gold/silver holdings in schemes begins
October 1, 2026:
- Deadline for scheme renaming and mandate alignment (6 months from April 1 effective date)
- All non-compliant scheme names must be corrected to match actual strategies
April 1, 2029:
- Final deadline for schemes to comply with portfolio overlap caps (50% maximum) or complete merger/wind-up procedures (3 years from April 1, 2026 effective date)
Conclusion: A Step Toward Greater Clarity and Investor Protection
This comprehensive regulatory overhaul represents SEBI’s commitment to maintaining investor protection and market integrity as India’s mutual fund industry continues its impressive growth trajectory.
The changes address real concerns, portfolio overlaps creating false diversification, misleading scheme names, obsolete categories, while introducing new tools better aligned with contemporary investor needs, particularly around goal-based and retirement planning.
For investors, the message is clear: expect greater transparency, clearer scheme mandates, and better tools for long-term financial planning. The transition period through 2026-2029 might involve some portfolio restructuring and scheme changes, but the long-term outcome should be a more trustworthy, easier-to-navigate mutual fund landscape.
For AMFI-registered distributors like myself, these changes create opportunities to provide enhanced value to clients through clearer explanations, better suitability assessments, and more sophisticated goal-based planning using new structures like Life Cycle Funds.
What are your thoughts on these changes? Are you interested in exploring Life Cycle Funds for retirement planning? Do you have existing solution-oriented schemes that need review? Do the expanded gold and silver options interest you for portfolio diversification?
I’m happy to discuss how these regulatory changes might impact your specific investment portfolio and whether any adjustments make sense for your situation.
Connect for Personalized Guidance: Amit Verma – AMFI-Registered Mutual Fund Distributor (ARN-349400)
📱 WhatsApp: +91-76510-32666
🌐 Website: mfd.co.in
📧 Email: planwithmfd@gmail.com
Important Disclaimer
This article is provided for educational purposes only and does not constitute investment advice, recommendation to buy or sell any specific mutual fund scheme, or solicitation to invest.
Regulatory Information: This content is based on SEBI circular dated February 26, 2026 (reference: SEBI/HO/24/13/15(2)2026-IMD-RAC4/I/5764/2026). Regulatory provisions, implementation timelines, and specific requirements are subject to amendments or clarifications by SEBI. Always refer to the official SEBI website (www.sebi.gov.in) for the most current regulatory information.
Individual Circumstances: The appropriateness of any investment decision, including choosing between different mutual fund categories or switching from solution-oriented schemes to Life Cycle Funds, depends entirely on your individual financial situation, specific goals, risk tolerance, time horizon, existing portfolio, and current obligations. What is suitable for one investor may be completely inappropriate for another.
Past Performance: Past performance of mutual fund schemes, categories, or strategies is not indicative of future results. All mutual fund investments carry market risks, and returns can be positive or negative.
Professional Consultation: Before making any investment decisions based on these regulatory changes, please consult an AMFI-registered mutual fund distributor or SEBI-registered investment advisor who can assess your complete financial picture and provide guidance specific to your circumstances.
Mutual fund investments are subject to market risks. Read all scheme-related documents carefully before investing.
About the Author
Amit Verma – AMFI-Registered Mutual Fund Distributor (ARN-349400)
As an AMFI-registered distributor, I may receive commissions on investments made in Regular plans of mutual funds. These commissions are paid from the scheme’s Total Expense Ratio (TER) and are not charged separately to you, but they are reflected in the scheme’s expense ratio and affect net returns over time. This creates a potential conflict of interest that you should independently consider when choosing between Regular plans (with professional guidance) and Direct plans (lower expenses, no professional support).
You can independently verify my AMFI registration (ARN-349400) at www.amfiindia.com.
I am registered as a Mutual Fund Distributor with AMFI. I am NOT registered with SEBI as an Investment Advisor. My guidance is limited to mutual fund distribution activities.
For personalized mutual fund guidance aligned with these regulatory changes:
- Visit: mfd.co.in/signup
- Contact: +91-76510-32666
- Email: planwithmfd@gmail.com
- Website: mfd.co.in
