The Securities and Exchange Board of India (Sebi) on Thursday announced several changes to the categorisation of mutual fund schemes.
The key changes announced by Sebi in its latest circular include the announcement of life-cycle funds, while solution-oriented funds are being discontinued with immediate effect. Additionally, AMCs can now launch both contra and value mutual funds, provided there is less than 50% overlap between different assets.
The capital markets regulator had released similar circulars in the past, on 6 October 2017 and 6 November 2020.
What are life-cycle funds?
Life-cycle funds are open-ended funds with predetermined maturity and glide path for goal-based investing, says the circular.
These schemes will invest across various asset classes, i.e., equity, debt, InvITs, ETCDs, Gold & Silver ETFs.
Sridharan Sundaram, a sebi registered investment advisor and CEO & principal officer, Wallet Wealth, lauded the changes, saying that the launch of life-cycle funds will give greater clarity to investors.
“These will include long-term funds with more allocation to equity and less to debt, whereas life-cycle funds (with a five-year lock-in) would be just like hybrid funds. With greater clarity, investors can decide based on their age and risk appetite,” he says.
Preeti Zende, founder of Apna Dhan Financial Services, said life-cycle funds offer a significant advancement in simplifying the investment process while addressing key concerns around risk management and emotional decision-making. “These funds gradually shift from higher-risk equities to safer debt instruments as the target date (e.g., retirement) approaches, helping to protect capital,” she noted.
Key changes in Sebi’s latest categorisation of funds
I. Fund of Funds: The circular also says that AMCs may launch a fund of funds (FOF) with multiple underlying funds under broad categories. The circular has divided FOF under six broad categories and 15 sub-categories.
The broad categories are equity-oriented FOF, debt-oriented FOF, Hybrid FOF (domestic), commodity-based FOF (domestic), overseas FOF, and domestic and overseas FOF. These funds of funds may be launched under three options: active, passive, or active & passive.
“Now the fund of funds can only be based on broad asset categorisation and not on different themes such as volatility,” adds Sridharan of Wallet Wealth.
II. Value & contra funds: Mutual funds will now be permitted to offer both value and contra funds, subject to the condition that the scheme portfolio overlap between the two schemes will not be more than 50%.
III. Sectoral funds: For any scheme offering in the sectoral and thematic equity category, mutual funds will ensure that no more than 50% of the scheme’s portfolio would overlap with other equity schemes in the sectoral/thematic category and other equity schemes categories, barring the large-cap scheme.
