SEBI’s Mutual Fund Classification Changes: How Much Difference Will They Make?

SEBI has introduced another set of changes to mutual fund classification with a clear objective. Make fund categories easier to understand, make portfolios more “true to label,” and reduce confusion created by overlapping products.

These changes are not cosmetic. They touch three important areas:

• How active equity schemes are classified
• How goal-based “solutions” funds are treated
• How SEBI plans to control portfolio overlap when AMCs launch multiple funds in the same bucket

One naming choice still raises a question too, which we will come to at the end.

Why SEBI Revised Mutual Fund Classification Again

Mutual fund categorisation is not just a filing exercise. It shapes how investors interpret risk, return potential, and the role of a fund in a portfolio.

Over time, categories can become too broad, or too loosely defined. That creates two common problems:

• Different funds look similar even though their labels are different
• New funds get launched that are not meaningfully different from existing funds

SEBI’s latest changes aim to improve transparency and reduce this confusion. While existing classifications have been fine-tuned, one big structural decision has also been made. The “solutions funds” segment has been entirely dropped.

Expanding Active Equity Categories From 11 to 13

Under the new rules, the number of schemes available under active equity will expand from 11 to 13.

There are no entirely new schemes being introduced. Instead, two categories have been split into separate buckets to allow clearer positioning and better differentiation.

1. Value Funds and Contra Funds are now separate categories

Earlier, Value and Contra were clubbed together. Now they are split into two distinct categories, which allows an AMC to offer:

• One value fund
• One contra fund

This matters because the two approaches are not the same and investors should not be forced to treat them as one blended idea.

SEBI has also increased the minimum equity allocation requirement here from 65% to 80%. That pushes these categories to behave like genuine equity funds, not diluted hybrids in disguise. The two ideas must also be demarcated.

2. Sector Funds and Thematic Funds are now separate categories

Sector and thematic strategies can look similar in marketing, but they behave differently in practice. SEBI has now demarcated them into two distinct categories.

Under the revised framework, these funds must have at least 80% exposure to the respective sector or theme.

This tightening improves label integrity. If a fund calls itself “sector” or “theme,” it must behave like one.

3. ELSS gets a clearer name

ELSS will now be called ELSS Tax Saver Fund. The intent is straightforward. The name should underline what the category is for, so investors do not treat it like a regular diversified equity product.

What this change means in practice

This shift helps both investors and product design.

For investors, it improves clarity:

• A contra fund and a value fund will no longer sit under the same umbrella
• Sector vs thematic strategies will be easier to interpret
• Minimum equity allocation rising to 80% reduces category drift

For AMCs, it creates more room:

• They can build clearer product line-ups
• They can position strategies without forced clubbing of different styles

Solutions Funds are out, Life Cycle Funds are in

SEBI has decided to scrap the “solutions funds” classification, which earlier included retirement funds and children’s funds. These were goal-based funds but had not attracted too much public attention.

SEBI is now replacing this segment with a new classification called Life Cycle Funds.

At a high level, the intent is simple. A life cycle fund will be a multi-asset approach that can allocate across equity, debt, liquid assets, gold, silver, exchange traded commodity derivatives, REITs, and INVITs. The category is meant to align more closely with real financial planning, where goals change as life stages change.

We have already covered the Life Cycle Funds framework in detail including how the structure is designed and what rules matter most for investors, so we are keeping this section short here. For the full deep dive, you can read the dedicated explainer. (Read the Life Cycle Funds explainer)

What matters in this article is the broader point. SEBI is moving goal-based positioning from a narrow “solutions” bucket to a more comprehensive, planning-led category.

SEBI’s 50% Overlap Clause: What It Is and Why It Matters

One of the most practical changes is SEBI introducing an explicit overlap clause.

SEBI is not putting a hard cap on how many funds an AMC can launch across categories. The framework still works like this:

• An AMC can have only one large cap fund and one mid-cap fund
• But there is no limit on the number of sectoral funds or thematic funds an AMC can issue

This “no limit” approach can create a problem. An AMC may launch multiple funds that look different by name, but in reality hold highly similar portfolios.

SEBI is now addressing this through the 50% overlap limit.

What the overlap clause says

If an AMC launches multiple sector funds or multiple thematic funds, the overlap between them should not exceed 50%.

This overlap condition is not restricted only within sector and thematic buckets. It also applies across other equity categories, apart from large cap funds.

Why this matters

This pushes AMCs to ensure each new fund has a genuinely different strategy or positioning.

It also protects investors from:

• accidentally buying two funds that behave almost the same
• ending up with hidden concentration despite owning “multiple funds”

In a market where NFOs and product launches are frequent, this is a meaningful step toward true-to-label investing.

So, How Much Difference Will These Changes Make?

Taken together, these changes are largely positive.

Here is what improves clearly:

• Active equity category break-up was overdue, especially for Value vs Contra and Sector vs Thematic
• Raising minimum equity allocation from 65% to 80% reduces dilution and category drift
• Replacing solutions funds with life cycle funds creates a more realistic structure for long-term planning
• The 50% overlap limit makes portfolios more distinct and reduces product duplication risk

In short, these reforms help categories match what investors think they are buying.

One Big Question Still Remains: “Other Funds” vs “Passive Funds”

Even after these improvements, one naming issue remains.

Why do we call the fourth category “Other Funds” instead of calling them “Passive Funds”?

Passive funds have a specific role in portfolios. They are not “other” in any vague sense. Naming them as “Passive Funds” could convey their role and purpose more directly, and make it easier for investors to understand what they represent.

This is not a regulatory shortcoming. It is simply a labelling decision that can influence investor understanding.

Key Takeaways

• SEBI has further refined MF classification to improve clarity and transparency for investors
• Active equity categories expand from 11 to 13 by splitting Value vs Contra and Sector vs Thematic
• Minimum equity allocation for these categories rises from 65% to 80%
• “Solutions funds” are removed and replaced with Life Cycle Funds as a planning-led, multi-asset category
• A 50% overlap cap is introduced to ensure multiple sector and thematic funds from the same AMC remain meaningfully different
• A naming gap still remains: “Other Funds” could be more clearly labelled as “Passive Funds”

Disclaimer: This article is for general information and educational purposes only. It does not constitute investment advice, a recommendation, or an offer to buy or sell any securities or mutual fund schemes. Mutual fund investments are subject to market risks. Please read all scheme-related documents carefully and consider consulting a qualified professional before taking any financial decision.