The Securities and Exchange Board of India (SEBI) has once again taken a proactive step in promoting investor protection, transparency, and innovation in the mutual fund industry. On the back of growing assets under management (AUM), increasing investor participation, and evolving financial instruments, SEBI has issued a draft circular titled “Categorization and Rationalization of Mutual Fund Schemes” for public comments. The document is now open for suggestions until August 8, 2025, through an online submission portal on SEBI’s official website.
The Objective
The main aim of this consultation paper is to gather views, feedback, and suggestions from all stakeholders, including investors, financial advisors, mutual fund houses, and other market participants, on the proposed changes to mutual fund scheme categorization. SEBI intends to balance product innovation and flexibility with scheme clarity and investor protection.
Background: The 2017 and 2020 Frameworks
Back in October 2017, SEBI laid down a landmark framework to bring standardization in the classification of mutual fund schemes. The categorization circular (later updated in November 2020) aimed to:
Ensure uniformity in mutual fund scheme classification.
Improve transparency and comparability.
Enhance investor understanding and reduce mis-selling.
However, the investment landscape has shifted considerably since then. New products such as Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) have gained traction. Investor expectations and portfolio strategies have become more sophisticated. Recognizing these trends, SEBI has decided that it is time to revisit and revise the earlier framework.
Why the Change?
There are a few key reasons driving the need for revision:
Rapid Growth of the Mutual Fund Industry: The increase in AUM and the number of retail investors has outpaced the existing classification structure.
Product Overlap: SEBI noted that some schemes across different categories were holding strikingly similar portfolios, leading to confusion and redundancy.
Need for Flexibility: The current framework may limit product innovation, which is essential to meet diverse investor goals.
Investor Clarity: With evolving product offerings, clarity in scheme objectives and structure is essential to protect investors from misleading or ambiguous marketing.
What’s New in the Draft Circular?
The revised draft circular proposes:
Refinements in scheme categorization to better reflect evolving investment strategies.
Introduction of new scheme types to accommodate emerging asset classes like REITs and InvITs.
Stricter guidelines to prevent excessive portfolio overlap across schemes within the same fund house.
Measures to ensure that schemes truly represent the categories they claim to be in.
How to Submit Comments
SEBI is inviting public comments on the draft circular until August 8, 2025.