The Securities and Exchange Board of India proposed on Friday rationalisation of rules around mutual funds in terms of names of schemes, classifications and more.
The regulator has proposed to have only five main categories going forward: equity, debt, hybrid, solution-oriented and other schemes. This is a shift from the earlier framework that allowed 36 distinct scheme types across various sub-categories. The market regulator said the move aims to reduce duplication.
Under the proposed structure, schemes will continue to be allowed within these five primary categories, but with tighter definitions, asset allocation rules and naming conventions. AMCs will also be permitted to launch additional schemes within a category only under strict conditions.
Conservative hybrid funds must invest between 10% and 25% of their assets in equity and 75% and 90% in debt instruments. Balanced hybrid funds must maintain 40% to 60% exposure each to equity and debt but will not be permitted to use arbitrage strategies.
SEBI has also sought public comments on whether residual portions of debt schemes (excluding short-duration categories like overnight, liquid, ultra-short, low duration and money market) can be invested in instruments, such as REITs and InvITs, within regulatory limits.
SEBI has proposed uniform classification across three sub-categories —retirement funds, children's Funds, and life cycle funds — each of which can be offered in equity-oriented, hybrid and debt-oriented variants.
Retirement and children's schemes will have a mandatory lock-in of five years or until the investor turns 60 or the child turns 18, whichever comes earlier.
In equity-oriented retirement and children's schemes, a minimum of 80% of assets must be invested in equity and equity-related instruments. Hybrid variants must split investments between 40% and 60% in equity and 40% and 60% in debt, with an additional 0–10% allowed in gold and silver instruments. Debt-oriented schemes must allocate at least 65% to debt, up to 25% in equity, and 10–25% in gold and silver instruments.
SEBI has proposed allowing residual portions of hybrid schemes to be invested in REITs and InvITs — except in the case of dynamic asset allocation and arbitrage funds.
In the solution-oriented category, such residual investments would be allowed in all schemes except retirement fund — hybrid and children's fund — hybrid.
A new format has been proposed for the life cycle fund of funds, where investments shift progressively from equity to debt as the target date approaches.
For example, a 10-year retirement life cycle FoF would invest in equity funds for the first four years, then hybrid for three years and finally debt for the remaining three. Such schemes may be launched every five years with a maximum tenure of 30 years.
They may also be merged with other schemes with similar maturity after investor consent. SEBI has asked if this format can be extended to other financial goals, such as housing and marriage, and whether varied lock-in periods (three, five or 10 years) would be appropriate.
SEBI has asked for public comments on the proposals by Aug. 8.
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