No Exit Load For Investors If Mutual Funds Breach New Portfolio Overlap Rules, Says Sebi

In an effort to make mutual fund investing easier to understand and more transparent, the Securities and Exchange Board of India (Sebi) has proposed some changes on how mutual fund schemes should be categorised. The market regulator released a consultation paper on July 18, 2025, and is inviting public comments on it until August 8.

Sebi’s draft suggests major changes to the current mutual fund framework. The regulator said the mutual fund industry has grown significantly, both in terms of assets under management (AUM) and investor participation. As a result, Sebi said it has now proposed changes to its categorisation of mutual fund schemes in order to allow more “flexibility for product innovation while maintaining investor protection and scheme clarity”.

“It was noted that in the case of some schemes, there was a significant overlap of portfolios. It was, therefore, felt necessary to introduce clear limits to the industry to avoid schemes with similar portfolios,” Sebi said in the draft.

Five Scheme Categories Proposed

The proposal divides all mutual fund schemes into five broad categories – equity, debt, hybrid, solution-oriented, and others.

This broad classification is aimed at making it easier for investors to identify schemes, to bring uniformity in scheme names across mutual funds and to ensure that schemes remain “true-to-label”. 

For this, Sebi said, “…the scheme name shall be the same as the scheme category.”

No Exit Load If Overlap Rules Are Breached

One major rule Sebi wants to bring in is a cap on how much two similar schemes under the same fund house can overlap. For instance, value and contra funds can exist only if their portfolios do not overlap by more than 50 per cent.

“The overlap condition shall be monitored at the time of new fund offer (NFO) deployment and subsequently on a semi-annual basis using month-end portfolios,” said Sebi.

If the overlap continues for too long, the asset management company (AMC) will be required to rebalance the portfolio or give investors a chance to exit without paying any exit load. “If the deviation persists beyond this period, investors of both the schemes shall be given an exit option without any exit load,” Sebi said.

Flexibility In Residual Investments

The circular also allows mutual funds to invest leftover amounts, those not already invested in the main asset category, but in other options like debt, real estate investment trusts (Reits), infrastructure investment trusts (InvITs), gold, or silver. 

However, this flexibility will not apply to every scheme. For instance, short-term and arbitrage funds will have restrictions on such investments.

Additional Schemes In Existing Category Allowed, With Conditions

Sebi added that mutual fund houses can launch a second scheme in an existing category if the first one is more than five years old and has over Rs 50,000 crore in AUM.

“Additional schemes shall have similar investment objectives, investment strategies and asset allocation - broad features as the existing scheme. A separate scheme information document shall be released by the AMC,” said Sebi.

However, it added that the older scheme should stop taking new investments once the new one is launched.

Sebi also said that any additional scheme launched in an existing category should follow a naming pattern similar to the original scheme. This is to maintain the “true-to-label” principle and avoid investor confusion. For example, if the existing scheme is called “Large Cap Fund (Series 1),” the new one could be named “Large Cap Fund (Series 2).”

“AMC shall ensure that no more than two schemes exist in the same category at any point in time,” Sebi further said.

Life-Cycle Funds Of Funds With Target Dates

Another idea Sebi proposed was the introduction of life-cycle funds of funds (FoFs) with target dates. These funds will adjust their investments over time, starting with more equity and gradually shifting to debt as the target date, like retirement, approaches.

Sebi is also exploring if these FoFs can be offered for other financial goals, such as buying a house or paying for children’s education, with lock-in periods of three, five, or 10 years.

The proposed rules came into effect from July 18 and mutual fund houses have six months to make the necessary changes.