SEBI proposes changes to the categorization framework of mutual fund schemes

In a consultation paper released last week, the domestic market regulator SEBI has proposed to review the categorisation of mutual fund schemes in order to improve clarity, introduce new schemes and to address the issue of overlap in portfolios of schemes.

The paper proposes changes to the scheme categorisation process and the financial instruments into which each fund would be allowed to invest in. It also wants to examine whether fund houses should be allowed to launch solution-oriented schemes.

On the lines of sectoral equity funds, SEBI's proposal also suggests allowing fund houses to launch sectoral debt funds.

If the new proposals are accepted, most mutual fund schemes will be able to invest a portion of their funds in REITs and InvITs. Additionally, the names of mutual fund schemes might change. Besides current labels like long-term fund or medium-term fund, scheme names could also include their specific investment tenure, such as 3-5 years or 7-10 years.

SEBI has proposed allowing fund houses to introduce solution-oriented life cycle Fund of Funds (FoFs). These FoFs would have a lock-in period and would be designed for specific financial goals like retirement, housing, or marriage. According to a SEBI paper, such open-ended, target-date FoFs could be structured in various ways.

According to SEBI, if its proposals are approved, each scheme's investment objectives, strategies, and benchmarks will be updated to align with their respective scheme categories.

The regulator would also allow fund houses to launch an additional scheme in the existing scheme categories, provided those fund houses meet certain conditions.

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