SEBI’s New Mutual Fund Categorisation Proposal Targets Clarity and Overlap Reduction
The Securities and Exchange Board of India (SEBI) has issued a consultation paper proposing a comprehensive review of mutual fund scheme categorisation.
The move is aimed at enhancing portfolio clarity, minimising overlap, and ensuring that investors are not misled by schemes with nearly identical portfolios.
The proposal, released on July 18, 2025, specifically focuses on Value and Contra funds and the extent of portfolio overlap permitted between them.
Why SEBI Is Reviewing Mutual Fund Scheme Categorisation?
Key Issues Identified
SEBI observed that multiple mutual fund schemes across different categories show substantial portfolio overlap, defeating the purpose of offering differentiated investment strategies. This lack of clarity not only confuses investors but also raises regulatory concerns.
Objectives of the Proposal
Prevent significant overlap of mutual fund portfolios
Enhance transparency and scheme differentiation
Allow investors to make informed choices
Promote healthy competition among mutual fund schemes
SEBI’s Proposal on Portfolio Overlap in Mutual Fund Schemes
Value and Contra Funds May Coexist – With Conditions
SEBI has proposed that Asset Management Companies (AMCs) be allowed to offer both Value and Contra mutual fund schemes, but only if no more than 50% of their portfolios overlap at any point in time.
Monitoring and Compliance
Initial Monitoring: Overlap limit to be verified during New Fund Offer (NFO) deployment
Ongoing Monitoring: Portfolio overlap to be checked semi-annually using month-end portfolios
What Happens If Portfolio Overlap Exceeds 50%?
In case the overlap exceeds the permissible 50%, SEBI mandates the following:
Portfolio Rebalancing Timeline
30 business days for AMCs to rebalance the overlapping portfolios
An additional 30 business days may be granted by the Investment Committee (IC), provided reasons are recorded and documented
Investor Protection Measures
If the overlap persists even after the extension, investors shall be offered an exit option without any exit load
This ensures that investor interests are protected without incurring penalties for AMC non-compliance
Permissible Asset Classes
SEBI has proposed that mutual funds can invest the non-overlapping portion of the portfolio in:
Equity instruments
Debt and money market instruments
Gold and silver-related instruments (permitted by SEBI)
REITs (Real Estate Investment Trusts)
InvITs (Infrastructure Investment Trusts)
Regulatory Ceiling Compliance
These investments must adhere to the limits specified in the Mutual Fund regulations for each asset class. The goal is to ensure risk diversification while maintaining category integrity.
Impact on Mutual Fund Industry and Investors
For Mutual Fund Houses
Encourages better product design and portfolio diversification
Prevents fund houses from launching schemes with identical or near-identical portfolios
Promotes differentiation and innovation
For Retail Investors
Greater clarity in scheme selection
Easier to distinguish between Value vs Contra funds
Better risk management and portfolio diversification
Transparent exit options in case of non-compliance
Key Highlights of SEBI’s Mutual Fund Categorisation Proposal
Feature Description
Overlap Limit Max 50% portfolio overlap between Value and Contra funds
Monitoring Frequency At NFO deployment and every 6 months thereafter
Rebalancing Period 30 business days (extendable by another 30 days)
Exit Option Investors get exit without load if deviation persists
Residual Portfolio Allocation Allowed in equity, debt, REITs, InvITs, gold, silver, etc.
Goal Enhance transparency, reduce overlap, protect investors
What Are Value and Contra Funds?
Value Funds
Value funds invest in undervalued stocks trading below their intrinsic value, expecting a price correction in the future.
Contra Funds
Contra funds adopt a contrarian investment strategy, picking stocks that are currently out of favor but expected to perform in the long term.
Despite their conceptual differences, both categories often show significant overlap, prompting the need for clear boundaries.
SEBI’s Approach: Balanced and Investor-Centric
SEBI’s proposal reflects its intent to safeguard investor interest without being overly restrictive for mutual fund houses. By allowing both fund categories to coexist with a controlled overlap, the regulator strikes a balance between innovation and regulation.
What’s Next? SEBI Seeks Public Feedback
This is currently a consultation paper, and SEBI has invited comments from stakeholders including AMCs, investors, analysts, and financial advisors.
Submission Deadline
The public and industry stakeholders are expected to share feedback before the deadline mentioned in SEBI’s circular.
Final Thoughts: A Step Toward Smarter Mutual Fund Investing
SEBI’s move to revise mutual fund categorisation guidelines is a welcome step in the evolving Indian financial ecosystem. By minimizing portfolio duplication and enhancing scheme differentiation, SEBI is not only protecting investors but also strengthening the credibility and innovation of the mutual fund industry.
