MUMBAI: The markets regulator Sebi has revamped the framework for classification of mutual fund schemes, introducing ‘life cycle funds’, scrapping the ‘solution-oriented schemes’ category and tightening the disclosure and overlap norms to enhance uniformity and investor protection.
The Sebi circular issued Thursday, which is aimed at ensuring “true-to-label” positioning and curbing exaggerated return claims in scheme names, comes as the regulator seeks to align the regulatory architecture with the evolving mutual fund landscape and emerging opportunities across asset classes.
The new circular broadly classifies mutual fund schemes into five categories — equity, debt, hybrid, life cycle and other schemes like fund of funds and passive funds such as index funds or exchange traded funds.
For investors to easily identification the schemes, the regulator has sought to bring in uniformity in names of schemes for a particular category across funds.
“For easy identification by investors and to bring in uniformity in names of schemes for a particular category across mutual funds and to ensure that schemes remain ‘true to-label’, the scheme name shall be the same as the scheme category,” Sebi said in the circular.
Words/phrases that highlight/emphasize only the return aspect of the scheme shall not be used in the name of the scheme,” it said further, adding the “type of scheme” description in the offer document and advertisements must strictly follow Sebi-prescribed format from now on.
The industry has welcomed the changes and new classification. “These are welcome changes. Sebi has addressed key issues such as portfolio overlap across funds. The introduction of life cycle funds resolves the static asset allocation problem seen in traditional retirement products. By aligning risk with different life stages, it helps reduce emotionally driven asset allocation decisions,” said Niranjan Avasthi, a senior vice-president at Edelweiss Mutual Fund.
Nikunj Saraf, chief executive at Choice Wealth, on the other hand said the new classification rules are a meaningful step towards simplifying an industry that had become increasingly complex for retail investors.
“By clearly defining categories across equity, debt, hybrid and solution-oriented funds and setting uniform asset allocation boundaries, Sebi is ensuring that schemes truly reflect what they claim to be. This reduces overlap, improves comparability and brings much-needed transparency to product positioning,” he added.
According to the circular, while the category of solution-oriented schemes has been discontinued with immediate effect, existing schemes under this category will stop accepting fresh subscriptions and merge with other schemes having similar asset allocation and risk profiles subject to Sebi approval.
The newly introduced life cycle funds will be open-ended schemes with a pre-determined maturity and a glide path strategy for goal-based investing across equity, debt, Invits, ETFs and gold/silver ETFs. These funds can be structured across different target maturities ranging from five years to 30 years allowing investors to choose a fund aligned to their retirement horizon, Avasthi said.
For index funds and ETFs, at least 95% of total assets are required to be invested in securities of the index being replicated or tracked. These will be open-ended schemes tracking a specific index, Sebi said.