Sebi plans to change MF norms to tackle overlaps, ensure names ‘true-to-label’

The Securities and Exchange Board of India (Sebi) has proposed changes to mutual fund scheme categorisation to address portfolio overlaps. The regulator may also permit fund houses to launch a second scheme in the same category and invest part of the corpus in Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs).

“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 a discussion paper on Friday.

Sebi has proposed new limits on how much two schemes can hold the same securities, in order to ensure clearer differentiation between funds. The regulator has suggested capping portfolio overlap at 50% for value and contra funds, as well as for schemes in the sectoral and thematic equity categories. This is to help investors distinguish one product from another.The overlap condition would be monitored at the time of NFO (new fund offering) deployment or on a semi-annual basis using month-end portfolios, it said.

Scheme Nomenclature

While retaining the existing structure of five broad groups – equity, debt, hybrid, solution-oriented, and other schemes such as index funds and exchange-traded funds (ETFs) – the regulator has recommended stricter uniformity in how schemes are named to remain “true-to-label.”Sebi has proposed standardising the naming of mutual fund schemes, which would have to directly reflect their category. For instance, a large-cap fund would simply be called a ‘large cap scheme’. Sebi has also proposed renaming certain debt schemes to better reflect their investment characteristics. It has suggested changing ‘low duration fund’ to ‘Ultra short to short term fund’. Additionally, the regulator suggested that fund names could include the intended duration, such as ‘medium term fund (3 to 4 years)’.

Lock-In

Sebi has proposed that solution-oriented schemes, such as retirement and children’s funds, must carry a specified lock-in period. While these lock-ins would apply to new investments, existing investors would be exempt, it said.

Second Scheme

The regulator has proposed allowing asset management companies to launch a second scheme in an existing category, subject to conditions.

The existing scheme would need to be at least five years old and have assets under management exceeding ₹50,000 crore. While the new scheme must have similar objectives and features, it should have a separate fund manager, and the existing scheme would stop accepting fresh subscriptions.

“AMC may merge an existing scheme with an additional scheme if there is a significant decline in the AUM of the existing scheme,” said the Sebi paper.