Eight years ago, when the markets regulator first rationalised mutual fund categories, I wrote that it was a good idea executed imperfectly. The 2017 circular reduced the chaos of overlapping schemes into 36 categories.
In practice, the total number of funds fell by just 29. Fund companies found ways to fit existing products into new boxes without changing much. It was like rearranging the furniture and calling it renovation.
Today, the Securities and Exchange Board of India (Sebi) has issued a sweeping circular that supersedes the entire framework. Parts of it are genuinely welcome. Other parts make one wonder how many new fund offers (NFOs) will hit the market by Diwali.
What's good
Sebi has scrapped solution-oriented schemes. Subscriptions stopped immediately. It could be said that retirement funds and children's funds were a labelling exercise dressed up as a category. A rupee invested in a "retirement fund" is no different from a rupee in a balanced fund.
Your mutual fund doesn't know whether you'll spend the money on retirement or a trip to Ladakh. It took Sebi eight years, but it got there.
The portfolio overlap restriction on sectoral and thematic funds is equally welcome. No sectoral or thematic fund can now have more than 50% overlap with other equity schemes, computed quarterly from daily values. Existing schemes get three years to comply or merge.
This addresses a growing problem: thematic funds barely distinguishable from diversified ones. An “infrastructure” fund dominated by Reliance, L&T and ICICI Bank is not meaningfully different from a large-cap fund. Now, fund houses must demonstrate differentiation with data. This rule has teeth.
The true-to-label naming rule is overdue. No more “opportunities” or “wealth creators” in scheme names. If it is a flexi-cap fund, it should say so.
What is worrying
The circular does not simplify; it expands. Sectoral debt funds—corporate bonds from specific sectors such as financial services, energy or infrastructure—have been introduced. For a retail investor already navigating 17 debt categories, this adds complexity rather than clarity.
Life cycle funds are another addition. Target-date funds with glide paths and multiple asset classes are conceptually sound. A fund that automatically shifts from equity to debt as a goal approaches is useful.
But experience suggests what may follow. Industry manufactures them at scale, markets them aggressively, and moves on. With around 40 AMCs allowed up to six such funds each, the market could see nearly 240 variants. The product designed to simplify investing becomes another source of the question: which one to pick?
The fund-of-funds framework is a regulatory masterwork, with six broad categories, three options per category, region-specific lists, and detailed nomenclature rules. Yet a name like “XYZ Domestic and Overseas Diversified Equity All Cap Omni FOF” may not make investing feel simpler.
The core tension in mutual fund regulation remains unchanged. The regulator creates distinct categories so investors can compare meaningfully. The industry launches as many products as the categories allow—each one an NFO, a campaign, a fresh stream of commissions. Every new line on the regulatory map becomes new territory to occupy.
The average Indian investor needs about four types of funds: a flexi-cap for core equity; a short-duration debt fund for stability; an ELSS for tax saving; and perhaps a hybrid fund.
Beyond that, sectoral funds, thematic funds, credit risk funds, life cycle funds, and fund-of-funds are optional at best and risky at worst. This circular has given the industry more optional things to sell.
Two years from now, the real test may not be compliance. It will be whether investors face fewer, clearer choices or simply more sophisticated clutter. Three decades of watching this industry, I know which way I'd bet. But it would be good to be proven wrong.
Dhirendra Kumar is founder and chief executive officer of Value Research, an independent investment advisory firm