Mutual Funds Push Back on SEBI’s New Scheme Rules

by Priya Bhatiya

Posted on August 20, 2025

The Securities and Exchange Board of India (SEBI) has proposed significant changes to mutual fund (MF) scheme categorization and management that have prompted mutual fund houses to seek further clarity, citing concerns about operational complexity and portfolio risks.

Key Elements of the Scheme Split Plan

• Portfolio Overlap Limits: SEBI now proposes that asset management companies (AMCs) can offer both Value and Contra funds, but with a strict rule: no more than 50% overlap in scheme portfolios, monitored at NFO launch and semi-annually. Breaches require portfolio rebalancing within 30 business days (with a possible extension), failing which investors get an exit option at no cost.
• Residual Assets Flexibility: Within both equity and debt funds, SEBI is allowing residual portfolio investments into asset classes like debt, gold, silver, REITs, and InvITs, enhancing diversification while maintaining regulatory limits.
• Scheme Categorization: Names and categories are to be standardized for better investor clarity (e.g., “Low Duration Fund” switching to “Ultra Short to Short Term Fund”, with explicit tenure mentioned).
• Scheme Duplication Checks: AMCs may introduce a second scheme in the same category only if the existing scheme is mature (5+ years) and has at least ₹50,000 crore AUM. This aims to prevent lookalike schemes and maintain product variety.

Risks and Concerns Flagged by Mutual Funds

• Operational Complexity: Monitoring portfolio overlaps between similar schemes (e.g., Value and Contra funds) and ensuring timely rebalancing may increase compliance burden and administrative risks for AMCs.
• Investor Communication: Many MFs see risk if investors misunderstand the intent or benefit of “split” schemes, especially if portfolios are frequently rebalanced due to overlap breaches.
• Product Innovation Limits: While SEBI’s intentions are to curb duplication and clarify categories, AMCs argue that tight controls could hinder their ability to launch innovative and differentiated products.
• Exit Option Risk: Allowing investors to exit without load after persistent overlap could lead to unpredictable outflows and portfolio instability for fund managers.
• Transitional Challenges: Existing funds in affected categories must comply within a year (for thematic/sectoral funds), posing adaptation risks and the need for significant portfolio adjustments.

SEBI’s Clarification Process

SEBI has invited public and industry comments on these proposals until August 8, 2025, to ensure stakeholder feedback is accounted for before finalizing the rules. The industry is expected to engage SEBI to clarify grey areas and refine regulations to allow reasonable flexibility while addressing risks and investor protection goals.

Overall, the scheme split plan marks a major step to strengthen investor protection, curb duplicity, and enforce operational discipline, but mutual funds are negotiating for practical clarity and risk mitigation.

Ref: MFs seek clarity from Sebi on its scheme split plan, flag risks