Securities and Exchange Board of India (SEBI) who is the capital market regulators of India has issued a major update to the framework which governs how mutual fund schemes are described and classified. This move is primarily aimed at aligning the different fund categories with changing investment strategies. Especially while keeping the investment boundaries clear for investors.
A circular that was released on February 26, 2026, SEBI said the new guidelines will now replace the earlier provisions which were issued on October 6, 2025, and November 6, 2025. These changes will be applied to all mutual funds, asset management companies (AMCs), trustee companies, and the Association of Mutual Funds in India (AMFI).
Five Broad Categories of Funds Remain
SEBI has clarified that mutual fund schemes will continue to be grouped into five main categories:
- Equity Schemes: Mainly investing in stocks and equity-related instruments.
- Debt Schemes: Mainly investing in bonds and other debt instruments.
- Hybrid Schemes: Investing in a mix of assets such as stocks, bonds, InvITs, and commodity-related instruments.
- Life Cycle Funds: Funds that adjust their investments based on the investor’s age or stage in life.
- Other Schemes: Including Fund of Funds, passive funds like index funds, and ETFs.
In addition to this, SEBI also explained the term “residual portion”. It is used to refer to the part of a fund’s corpus which is not invested in its core asset classes as defined under the scheme.
Clear Investment Rules for Equity Funds
One of the main updates in this new scheme change is the introduction of defined investment thresholds for different types of equity funds. This will help in making the funds easier to understand and compare for investors. Moreover, SEBI has also provided uniform descriptions for each category. Examples include:
- Multi Cap Fund: Must invest at least 75% of total assetsin equity, with at least 25% each in large-cap, mid-cap, and small-cap stocks. Described as an open-ended equity scheme investing across all three market caps.
- Large Cap Fund: Must invest at least 80% of total assetsin stocks of large-cap companies. Described as an open-ended equity scheme predominantly investing in large-cap stocks.
- Large and Mid Cap Fund: Must allocate a minimum of 35% each to large-cap and mid-cap stocks. Described as an open-ended equity scheme investing in both large-cap and mid-cap stocks.
These rules are designed to provide clarity on how funds allocate their investments. This will make it easier for investors to compare similar funds across different asset management companies.
Why the Update Matters
According to SEBI, the revised classification framework is meant to:
- Keep up with the evolving mutual fund landscape.
- Ensure consistency across fund houses.
- Provide clear, uniform descriptionsto improve comparability for investors.
- Allow investors to make more informed choiceswhile maintaining appropriate boundaries on investment strategies.
By introducing these changes, SEBI aims to strike a balance between innovation in mutual fund products and transparency for investors, making it easier for both new and seasoned investors to understand what they are investing in.
