What significant changes were made in the revision?
The reclassification introduces several structural changes to equity, debt, and hybrid schemes. Sebi has created a new category of life cycle funds and has banned fixed-income schemes such as pension and children’s funds. Fund houses are now allowed to offer both value and inverse funds, subject to a 50% portfolio overlap cap, with similar restrictions also applicable to sectoral and thematic funds.
The rules also widen the scope of residual allocation in equity and hybrid schemes to include assets such as gold and silver instruments and InvITs. In addition, arbitrage fund debt exposure is now limited to short-term government securities and repos on government bonds.
How will this benefit investors?
The change is aimed at making it easier to understand and compare mutual funds. Standardized categories and nomenclature clarify what each scheme does, life cycle funds introduce an objective-based option, and stricter overlap rules with new disclosures improve transparency, while phasing out old schemes reduces confusion.
What is this new category – Life Cycle Funds?
Life Cycle Funds are open-ended, target-date funds that follow a Glide Path strategy, investing in equities, debt, commodity derivatives, InvITs, and precious metals ETFs.
These funds can be started in increments of five years, from 5 to 30 years. They track fixed asset allocation bonds that move from maturity to maturity based on years and carry rated exit loads – 3% if the investment is withdrawn within one year, 2% within two years, and 1% within three years. The structure gradually reduces equity exposure as the maturity date approaches, helping the portfolio align with the investor’s target timeline.
What happens to existing settlement-based schemes such as children’s gift funds and pension funds?
The category of solution-based schemes has been discontinued with immediate effect. Existing schemes under this category are required to immediately stop accepting subscriptions and merge with another scheme having similar asset allocation and risk profile.
Do mutual funds now offer both value and inverse funds? What has changed for sector and thematic funds?
Previously, mutual funds could offer either a value fund or an inverse fund. Under the new rules, they can offer both, provided the portfolio between the two does not exceed 50%.
Similarly, for sectoral and thematic equity schemes, mutual funds should ensure that portfolio exposure to other equity schemes in the same category – or in other equity categories (except large-cap schemes) – does not exceed 50%.
Can mutual fund schemes also now invest in gold and silver?
yes. Under the new rules, equity schemes can place their remaining allocation in commodity derivatives, money market and other liquid instruments, gold and silver instruments, and InvITs within regulatory limits. For example, a large-cap fund must invest at least 80% in large-cap stocks, while the remaining 20% can now also include gold and silver ETFs.
What are the potential effects of arbitrage funds?
Arbitrage funds must now limit their debt exposure to government securities with maturities of less than one year and repos on government bonds. Mutual funds typically hold around 30% in fixed income securities. This, along with the increase in Security Transfer Tax (STT) from April 1, is likely to reduce arbitrage fund returns by around 50 basis points.
As a credible and reliable news source Retirement
