MUMBAI: The Securities and Exchange Board of India (Sebi) has tightened mutual fund rules to curb look-alike schemes and reduce portfolio overlaps, in a move aimed at making fund choices clearer for investors and pushing fund managers to differentiate their products.
In a circular issued on Thursday, the market regulator capped portfolio overlaps across several categories, reshaped parts of mutual fund classification, discontinued solution-oriented schemes, and introduced two new products — life cycle funds and sectoral debt funds.
The move follows a surge in thematic and sectoral launches in recent years, raising concerns that many schemes held similar stocks despite being marketed as distinct offerings, creating concentration risks that were not always obvious to retail investors.
Mint explains what has changed and what it means for investors.
What has Sebi changed for mutual funds?
Sebi is pushing fund houses to ensure schemes are meaningfully different from one another. Thematic and sectoral schemes can now have only 50% overlap with other equity schemes, except large-cap funds.
Sectoral funds invest in a specific sector such as banking or technology, while thematic funds invest around broader themes like consumption or infrastructure across sectors.
Thematic and sectoral funds managed net assets of ₹5.4 trillion as of December 2025, according to the Association of Mutual Funds in India (Amfi).
The regulator has also allowed fund houses to launch both value and contra funds, categories that were earlier restricted to one per fund house, provided they comply with the 50% overlap cap. Value funds invest in undervalued stocks, whereas contra funds take a contrarian approach by investing in stocks that are currently out of favour but have potential for long-term growth.
Asset management companies (AMCs) must now disclose category-wise portfolio overlap on their websites every month. For thematic and sectoral schemes, overlap will be calculated quarterly using the average of daily overlap figures during the period.
Why were the changes needed?
Sebi began consultations in 2025 to examine whether schemes were offering distinct investment strategies or largely replicating one another.
Fund houses are permitted to launch only one scheme per category, but current regulations place no limit on sectoral and thematic funds. Over the past year, 37 sectoral and thematic fund new fund offers (NFOs) were launched, compared with 19 across the broader equity category, according to data from Amfi.
A Mint analysis of the top five thematic funds by assets in January found that three of the five schemes had more than 50% overlap with another scheme from the same fund house. Although overlaps may also exist with schemes from other AMCs, the analysis was limited to the top five funds.
High overlap increases the likelihood of multiple schemes underperforming simultaneously because they hold many of the same stocks. The overlap is often hidden, as portfolios may appear diversified despite underlying concentration.
“This was discussed at length and is the right thing to do when you have so many schemes. The idea is that if you have enough research capabilities then you should work on different scrips. Working on the same scrips does not do justice to the investor,” said DP Singh, deputy managing director and joint chief executive officer at SBI Mutual Fund.
What are the other changes in MF categorization?
Sebi has also directed fund houses to discontinue solution-oriented schemes immediately. These funds are designed for specific long-term goals, including retirement funds and children’s funds, and typically carry mandatory lock-in periods.
As of January, solution-oriented schemes had assets under management (AUM) worth ₹57,274.17 crore, accounting for less than 1% of the mutual fund industry’s total assets, according to Amfi.
Sebi has also introduced a new product called life cycle funds. These schemes can allocate assets across equity, debt, infrastructure investment trusts (InvITs), exchange-traded commodity derivatives, and gold and silver exchange traded funds (ETFs). Fund houses may launch such schemes with tenures ranging from five to 30 years, in multiples of five.
Only six life cycle funds can remain open for subscription in a mutual fund at any time. Asset allocation will automatically shift over the life of the fund, typically starting with higher equity exposure and gradually moving towards debt and relatively stable assets as maturity approaches, reducing risk as the investment horizon shortens.
“Life cycle funds are a more scalable product, even globally. If my retirement is in 10 years and someone else's is in 20 years, our asset allocation should not be the same. This problem has been resolved using a life cycle fund, which doesn’t happen in solution-oriented funds,” said Vaibhav Shah, head of business strategy, products and international business at Mirae Asset Investment Managers.
The regulator also introduced a framework for sectoral debt funds, which can invest in areas such as financial services, energy, infrastructure, housing, and real estate.
How does this change things for mutual funds?
Mutual funds have been given a three-year window to bring portfolio overlaps within prescribed limits.
In the first year, AMCs must reduce 35% of excess overlap, followed by another 35% in the second year and the remaining 30% in the third. Schemes that still fail to comply will be merged under regulatory rules. This could potentially trigger consolidation within fund houses that launched multiple thematic variants in recent years.
The discontinued solution-oriented schemes will stop accepting fresh inflows and will be merged with other schemes having a similar asset allocation and risk profile, subject to prior approval from the regulator.
Mandatory monthly disclosures of category-wise portfolio overlap is aimed at improving transparency. With clearer scheme naming rules and stricter “true-to-label” requirements, the regulator is signalling that competition among mutual funds should shift from frequent launches to investment strategy and execution.
However, the overlap cap may also limit flexibility for fund managers.
"Portfolio management will be constrained as if a sector is undervalued, the fund manager cannot increase their allocation as it might breach the overlap cap. This could turn particularly restrictive for funds with fewer constituents,” said Ananya Roy, founder of Credibull Capital, an investment advisory firm.
What do the changes mean for investors?
Retail investors are likely to see clearer differentiation between schemes, making it easier to select funds aligned with their risk profiles and return expectations. Fund managers also see life cycle funds emerging as an alternative to solution-oriented products.
“There was a lot of demand for retirement and children's funds. What’s good is that they have not been thrown out. Demand will shift from solution oriented to life cycle funds,” said Roy.
However, the merging of current solution-oriented funds with other funds of similar asset allocation may create problems for investors.
“Mutual funds will want to merge their solution-oriented schemes with other schemes or convert to life cycle funds. This can be a bit challenging for existing investors,” said Shah of Mirae.