SEBI's Proposed Reforms for Mutual Funds

SEBI's Proposed Reforms for Mutual Funds: A Guide for Indian Investors

Introduction

The Indian mutual fund industry is heading toward a landmark transformation. SEBI’s Proposed Reforms for Mutual Funds, released as part of a draft circular on July 18, 2025, introduce sweeping changes in the way schemes are categorised, managed, and offered to investors. These reforms are aimed at eliminating portfolio overlaps, promoting innovation, and increasing transparency—ultimately making the mutual fund ecosystem more investor-friendly.

This guide will walk you through what these Proposed Reforms mean for your financial future.

Why SEBI's Proposed Reforms for Mutual Funds Matter

At the heart of SEBI’s Proposed Reforms for Mutual Funds is the principle of “true-to-label” investing. SEBI wants every scheme’s name to accurately reflect its actual investment strategy. This helps you, as an investor, make informed decisions without getting lost in complex or misleading scheme names.

SEBI observed widespread portfolio overlap within fund houses, leading to confusion and reduced differentiation. These proposed reforms aim to tighten controls, foster unique investment offerings, and boost investor confidence through better transparency.

Breakdown of SEBI's Proposed Reforms for Mutual Funds by Scheme Type

The draft circular encompasses 20 proposals, meticulously spread across five main categories: Equity, Debt, Hybrid, Solution-oriented schemes, and Other Schemes. Here’s a closer look at some of the SEBI’s Proposed Reforms for Mutual Funds.

Equity Funds: More Choices, Less Overlap

SEBI is looking to provide greater flexibility while maintaining distinct investment strategies for equity funds.

Value and Contra Funds: Fund houses might soon be able to launch both Value Funds and Contra Funds. However, a critical condition is that the portfolio overlap between these two schemes must not exceed 50% at any given time. This ensures that while you have more options, each scheme retains its unique investment philosophy and investment style.
General Portfolio Overlap: For other equity schemes, the portfolio overlap generally should not exceed 50%. This will be rigorously monitored during New Fund Offers (NFOs) and semi-annually thereafter. This focus on distinct investment strategies aims to provide clearer choices for Indian investors.
Rebalancing and Exit Options: If a fund house breaches the portfolio overlap limit, they will have 30 days to rebalance. Should the overlap persist beyond the permitted period, investors will be offered an an exit option without any exit load, safeguarding their interests.
Residual Assets Flexibility: Equity funds will have more flexibility in deploying their residual portion (the part of the portfolio not invested in the primary asset class). This can now include investments in debt, gold, silver, Real Estate Investment Trusts (REITs), and Infrastructure Investment Trusts (InvITs), within regulatory limits. This allows for more dynamic portfolio management and diversification opportunities.

These changes under SEBI’s Proposed Reforms for Mutual Funds aim to ensure you get truly differentiated equity options.

Debt Funds: Clearer Terms and New Avenues

The proposals for debt funds focus on enhancing clarity and introducing new investment avenues.

“Term” instead of “Duration”: The term ‘Duration’ in debt fund names is proposed to be changed to ‘Term’ for better clarity, making it easier for investors to understand the fund’s investment horizon. For example, ‘Low Duration Fund’ will be renamed to ‘Ultra Short to Short Term Fund’.
Displaying Average Maturity: All debt funds will be required to clearly display their average maturity term (e.g., Overnight Fund – 1 day; Medium Term Fund – 3–4 years). This will help you make more informed decisions based on your investment horizon and risk appetite.
Sectoral Debt Funds: Fund houses may be allowed to launch sectoral debt funds. This will open up new specialized investment opportunities, provided the portfolio overlap between any two such schemes does not exceed 60%, and there’s sufficient availability of investment-grade paper in the chosen sectors. This innovation could provide more targeted wealth-building opportunities.
REITs and InvITs in Residual Portion: Similar to equity funds, the residual portion of existing debt funds (excluding short-duration funds like overnight and liquid funds) can also be deployed in REITs and InvITs, offering additional avenues for diversification.

These debt-related initiatives under SEBI’s Proposed Reforms for Mutual Funds simplify product selection and enable more targeted investing.

Hybrid Funds: Sharper Definitions and Diversification

Hybrid funds, which offer a blend of asset classes, will also see some refinements aimed at better defining their characteristics and providing diversification.

Arbitrage Fund Focus: Arbitrage funds may be restricted to investing their debt portion only in government securities or repos backed by such securities, aiming for clearer risk-adjusted returns.
Equity Savings Scheme Exposure: Equity Savings Schemes may be required to maintain a net equity and arbitrage exposure between 15% and 40%, with defined minimum allocations to equity and debt, ensuring their true nature as a hybrid offering.
REITs and InvITs: Most hybrid funds, including solution-oriented schemes (except arbitrage funds and dynamic asset allocation funds), will be allowed to invest in REITs and InvITs, further expanding diversification avenues.
Multi-Asset Funds: Foreign securities will be treated as a separate asset class in multi-asset funds, providing greater clarity on diversification within these schemes.

With these shifts, SEBI’s Proposed Reforms for Mutual Funds help hybrid investors achieve better-defined and safer diversification.

Solution-Oriented Schemes: Lifecycle Investing with Lock-ins

A significant proposal for solution-oriented funds is the allowance for lifecycle fund of funds (FoFs) with a target date.

Target Date FoFs: Imagine a Retirement Lifecycle FoF 2040, structured to gradually shift its investments from equity to hybrid and then to debt funds as it approaches its target date. These FoFs will have a lock-in period aligned with their target date, encouraging long-term, goal-based investing. This is a great step towards tailored financial planning, aligning your investments with your life goals.

Other Schemes: Introducing Second Schemes in a Category

Perhaps the most innovative proposal is the allowance for additional schemes in the same category:

Second Scheme in a Category: Fund houses can launch a second scheme only if the original is over five years old and has AUM above ₹50,000 crore.
Subscription Freeze for Original Scheme: Once a second scheme is introduced, the original scheme must stop accepting new investments.
Naming Convention & Structure: New schemes must match the strategy and asset allocation of the original and clearly state series numbers (e.g., Series 1, Series 2). The Total Expense Ratio (TER) must also remain consistent.

These proposals within SEBI’s Proposed Reforms for Mutual Funds aim to foster product innovation without sacrificing clarity or investor trust.

What's Next?

SEBI is seeking feedback on the draft reforms until August 8, 2025, via its official portal. As an informed investor, this is your opportunity to shape the future of India’s mutual fund industry.

SEBI’s Proposed Reforms for Mutual Funds are a bold move toward greater transparency, product innovation, and investor protection. By offering clearer definitions and increased options, SEBI empowers you to build smarter, goal-oriented portfolios.

Note: Mutual fund investments are subject to market risks. Please read all scheme-related documents carefully before investing. The past performance of the schemes is neither an indicator nor a guarantee of future performance.