The mutual fund industry is set for structural changes after the capital markets regulator overhauled scheme categorisation rules, scrapping solution-oriented funds and introducing new investment categories aimed at improving clarity for retail investors.
The changes go beyond nomenclature and will shape investors holding retirement, children’s and thematic mutual funds.
Retirement and children’s funds phased out
One of the biggest shifts is the discontinuation of solution-oriented schemes, including retirement and children’s funds.
Existing schemes will stop accepting fresh investments and will be merged with similar funds after regulatory approval. “This marks a significant recategorisation exercise in the mutual fund industry,” said Bharath Rathore, executive director, Anand Rathi Wealth Limited.
For investors, the impact depends largely on lock-in status. Rathore explained that investors who have completed the mandatory five-year lock-in may consider reallocating to diversified equity categories aligned with their financial goals, while others may need to wait until scheme mergers are completed before reassessing investments.
The changes are effectively a regulatory sunset for the children’s and retirement fund category, said Sameer Mathur, managing director and founder of Roinet Solution. Post-merger, the risk–return profile of investments may change as portfolios align with the receiving scheme’s mandate rather than the original goal-based structure.
Nilesh D Naik, head of investment products at Share.Market, said that clarity is needed for investments in lock-in, although mergers are expected to follow similar asset allocation frameworks.
Life Cycle Funds replace goal-based schemes
The Securities and Exchange Board of India (Sebi), the regulator, has introduced Life Cycle Funds as the new vehicle for goal-based investing.
These funds automatically reduce equity exposure as investors approach their financial goal, following a predefined glide path. Unlike traditional hybrid or retirement funds where allocation decisions rest with fund managers, asset allocation here changes systematically over time, Rathore explained.
Naik said this structure allows investors to manage asset allocation shifts within the same fund, improving tax efficiency by avoiding frequent fund switching.
Aditya Agarwal, cofounder of Wealthy.in, said the regulatory changes align Indian mutual funds with global goal-based investing practices by introducing transparent and rule-based allocation frameworks.
Tighter rules for thematic funds
Sebi has also capped portfolio overlap at 50 per cent across thematic and sectoral schemes.
According to Rathore, this will reduce duplication where differently named funds previously held near-identical portfolios. However, thematic funds remain inherently concentrated and cyclical despite reduced overlap risk.
Naik added that stricter differentiation may discourage asset management companies from launching similar-looking schemes, reducing investor confusion.
More categories, but not guaranteed returns
The regulator has also permitted fund houses to offer both value and contra funds while introducing sectoral debt funds.
While these changes improve product differentiation and transparency, better categorisation alone does not ensure superior returns, Rathore cautioned. Investment outcomes will continue to depend on suitability, risk assessment and time horizon rather than category labels.
Overall, Agarwal said the overhaul aims to make schemes “true to label”, improving comparability and strengthening investor trust over time