SEBI New Equity Mutual Fund Classification Rules 2026: What Has Changed and What Investors Must Know

The Securities and Exchange Board of India (SEBI) has introduced a major overhaul in the classification and structure of equity mutual fund schemes. The new framework aims to simplify investment choices, reduce confusion caused by overlapping schemes, and ensure funds remain true to their stated objectives.
Here is a complete breakdown of what has changed and what it means for investors.

Why Did SEBI Introduce These Changes?
Over the years, the mutual fund industry expanded rapidly, leading to:

• Too many similar schemes within the same category
• Portfolio overlap across funds from the same AMC
• Confusing naming conventions
• Schemes not strictly following their defined investment mandate

To address these concerns, SEBI revised the categorisation rules, tightened portfolio norms, and introduced stricter compliance requirements.

Key Changes in Equity Mutual Fund Classification
1. Revised and Expanded Equity Categories

• SEBI has refined the structure of equity mutual fund categories. There are now 13 clearly defined equity scheme classifications, each with stricter minimum equity allocation requirements.
• Categories such as value funds, contra funds, focused funds, and dividend yield funds must now maintain higher mandatory equity exposure. This ensures funds remain aligned with their stated investment style.
• This move improves transparency and makes fund comparison easier for investors.

2. Portfolio Overlap Limit Introduced

• One of the most significant reforms is the introduction of a portfolio overlap cap.
• Sectoral and thematic equity funds cannot have more than 50 percent portfolio overlap with other equity schemes from the same fund house (excluding large-cap funds).
• Overlap will be calculated quarterly using daily portfolio disclosures.
• Non-compliant schemes must be merged or restructured within three years.
• This step prevents duplication and ensures each scheme offers a distinct strategy rather than acting as a replica of another fund.

3. Stricter Naming and “True-to-Label” Rules

• SEBI has mandated that scheme names must strictly match their regulatory category. Fund houses cannot use misleading or return-focused terms in scheme names or marketing material.
• This protects investors from being influenced by aggressive branding and ensures clarity in product positioning.

4. Value and Contra Funds – Now Both Allowed

• Earlier, an AMC could offer either a value fund or a contra fund, but not both. Under the new rules:
• AMCs can now launch both value and contra funds.
• However, the portfolio overlap between the two must remain below 50 percent.
• This allows greater product flexibility while ensuring meaningful differentiation.

5. Discontinuation of Solution-Oriented Schemes
The “solution-oriented” category, which included retirement funds and children’s funds, has been discontinued.
Existing schemes under this category:

• Will stop accepting fresh subscriptions.
• Must be merged with other suitable schemes after regulatory approval.
• Investors holding such funds should watch for communication from their respective fund houses regarding restructuring or merger plans.

6. Broader Diversification Allowed
Equity schemes are now permitted to invest their residual allocation in:

• Gold ETFs
• Silver ETFs
• InvITs

This enhances diversification options without changing the core equity mandate of the fund.

What This Means for Investors
The new framework brings several benefits:

• Greater transparency
•  Clearer scheme positioning
•  Reduced duplication across funds
•  Better alignment between fund name and portfolio
•  Stronger regulatory oversight

For investors, this means more clarity while selecting funds and greater confidence that schemes are operating according to their stated investment strategy.

Should You Take Any Action?
If you are currently invested in equity mutual funds:

• Review communication from your fund house regarding reclassification or mergers.
• Check if your scheme category has changed.
• Evaluate whether the revised mandate still aligns with your financial goals.
• Long-term investors do not need to panic. These changes are structural and aimed at strengthening the mutual fund ecosystem rather than disrupting portfolios.

Final Thoughts
SEBI’s revised equity mutual fund classification rules mark an important regulatory reform for the Indian mutual fund industry. By tightening definitions, limiting portfolio overlap, and enhancing transparency, the regulator aims to protect investor interests and improve product clarity.
As the industry transitions to the new structure, investors should stay informed and ensure their portfolio remains aligned with their risk profile and long-term goals.