SEBI Introduces Life Cycle Funds, Ends Solution Schemes
Securities and Exchange Board of India Overhauls Mutual Fund Categorisation Framework; Introduces Life Cycle Funds, Tightens Portfolio Overlap Norms
Mumbai, February 26, 2026: In a sweeping reform aimed at strengthening investor protection and ensuring “true-to-label” mutual fund offerings, the Securities and Exchange Board of India (SEBI) has issued a comprehensive circular revising the categorisation and rationalisation framework for mutual fund schemes.
The new circular supersedes Clause 2.6 of the Master Circular dated June 27, 2024, and introduces structural changes across equity, debt, hybrid, Fund of Funds (FoFs), and a newly formalised Life Cycle Fund category. The changes come into force with immediate effect, with existing schemes required to comply within six months.
🔹 Broad Classification of Schemes
SEBI has retained and refined five broad categories:
Equity Schemes
Debt Schemes
Hybrid Schemes
Life Cycle Funds (new detailed structure introduced)
Other Schemes (FoFs and Passive Schemes like Index Funds/ETFs)
The term “residual portion” has been clarified as the corpus not invested in the main/core asset class as per scheme characteristics.
🔹 Major Changes in Equity Schemes
📌 Investment Norms Reaffirmed
Minimum allocation thresholds have been clearly restated:
Multi Cap Fund: Minimum 75% in equities with 25% each in large, mid and small caps.
Large Cap Fund: Minimum 80% in large caps.
Large & Mid Cap Fund: Minimum 35% each in large and mid caps.
Mid Cap / Small Cap Funds: Minimum 65% in respective categories.
Flexi Cap Fund: Minimum 65% in equities.
Dividend Yield, Value, Contra, Focused (max 30 stocks), Sectoral & Thematic Funds: Minimum 80% in equities.
ELSS (Tax Saver): Minimum 80% in equities.
Large, mid and small cap definitions will continue as per Clause 2.7 of the Master Circular. ESG norms remain governed separately.
🔸 Portfolio Overlap Restrictions – A Big Structural Shift
SEBI has introduced strict portfolio overlap norms:
Value and Contra funds can co-exist, but portfolio overlap between them cannot exceed 50%.
Sectoral/Thematic schemes cannot have more than 50% overlap with other equity schemes (except large cap schemes).
Overlap to be calculated quarterly using daily averages.
Detailed ISIN-level formula provided (minimum weight of common securities summed up).
🕒 Glide Path for Existing Schemes
To reduce overlap:
| Year | Required Reduction |
|---|---|
| Year 1 | 35% of excess |
| Year 2 | Additional 35% |
| Year 3 | Remaining 30% |
Non-compliant schemes after 3 years must be merged.
Further, new sectoral/thematic launches must follow sector/theme lists published half-yearly by AMFI in consultation with SEBI.
🔹Debt Schemes – Duration Discipline and New Flexibility
Debt categories remain granular, ranging from:
Overnight Fund (1-day maturity)
Liquid Fund (up to 91 days)
Ultra Short (3–6 months duration)
Short Term (1–3 years)
Medium (3–4 years)
Medium to Long (4–7 years)
Long Duration (7+ years)
Dynamic Bond
Corporate Bond (80% in AA+ and above)
Credit Risk (65% in AA and below)
Banking & PSU
Gilt & 10-year Constant Maturity
Floating Rate Funds
Sectoral Debt Funds (restricted to specific sectors like Financial Services, Energy, Infrastructure, Housing, Real Estate)
🔸 Special Provisions
Medium & Medium-to-Long duration funds may reduce duration to 1 year under adverse conditions, with justification recorded and reviewed by Trustees.
Sectoral exposure limits will not apply to sectoral debt funds.
Residual investments in InvITs allowed in most debt schemes (except overnight, liquid, ultra-short, low duration and money market funds).
🔹Hybrid Schemes – Clear Asset Boundaries
| Category | Equity Allocation | Debt Allocation |
|---|---|---|
| Conservative Hybrid | 10–25% | 75–90% |
| Balanced Hybrid | 40–60% | 40–60% (No arbitrage allowed) |
| Aggressive Hybrid | 65–80% | 20–35% |
| Dynamic Asset Allocation | Dynamic | |
| Multi Asset Allocation | At least 3 asset classes, minimum 10% each | |
| Arbitrage Fund | 65% minimum equity, no InvITs | |
| Equity Savings | 65% equity (15–40% net equity exposure) |
Hybrid schemes may invest residuals in InvITs, ETCDs, Gold ETFs and Silver ETFs (except arbitrage funds).
🔴 Solution Oriented Schemes Discontinued
The “Solution Oriented” category has been discontinued immediately.
No fresh subscriptions allowed.
Existing schemes must merge with similar schemes after SEBI approval.
Changes will not be treated as Fundamental Attribute Changes (FAC).
Foreign securities will not be treated as a separate asset class.
🔹 Introduction of Life Cycle Funds (Target-Date Glide Path Funds)
A major structural innovation.
Key Features:
Tenure: 5 to 30 years (in multiples of 5).
Maximum 6 active life cycle funds per AMC.
Automatic glide path reducing equity exposure as maturity nears.
Asset mix includes Equity, Debt, InvITs, ETCDs, Gold & Silver ETFs.
Arbitrage exposure allowed (up to 50%) when maturity < 5 years.
Exit load:
3% within 1 year
2% within 2 years
1% within 3 years
Benchmarking to follow Multi Asset Allocation framework. Scheme name must include maturity year (e.g., Life Cycle Fund 2055).
Debt exposure for last 5 years limited to AA & above rated instruments.
🔹 Fund of Funds (FoF) – Standardised Framework
FoFs with multiple underlying funds now classified into:
Equity Oriented FoF (Domestic)
Debt Oriented FoF (Domestic)
Hybrid FoF (Aggressive, Conservative, Dynamic, Income+Arbitrage, Multi-Asset)
Commodity FoF
Overseas FoF (Country/Region/Sector based)
Domestic + Overseas FoF
Naming Rules Introduced
Uniform nomenclature mandated:
Active FOF
Passive FOF
Omni FOF (Active + Passive mix)
Minimum 95% investment in underlying schemes required.
Existing FoFs must be aligned by August 31, 2025.
Grandfathering allowed if scheme count exceeds new caps, but no further launches permitted in that sub-category.
🔹 Benchmarking Framework Tightened
Specific benchmark guidelines laid out:
Income Plus Arbitrage FoF must use fixed approved indices (e.g., NIFTY Short Duration Debt Index, CRISIL Arbitrage Index).
Once benchmark and weight chosen, cannot be changed without SEBI approval.
Weightage in benchmark must reflect actual investment pattern.
For overseas FoFs, benchmark must align with duration/credit profile.
🔹 Mandatory Monthly Disclosure of Portfolio Overlap
AMCs must disclose:
Equity vs Equity overlap
Debt vs Debt overlap
Hybrid vs Hybrid overlap
To be published monthly on AMC websites.
Detailed ISIN-level formula provided under Annexure A.
🔹 Scheme Name Discipline – “True to Label”
Scheme name must match category.
Return-oriented phrases not allowed.
Uniform description below scheme name must match SEBI prescribed language.
Changes in nomenclature, objective, benchmark etc. to align with new norms will not be treated as fundamental attribute changes.
Clause 1.4.1 of the Master Circular has been deleted.
🔹 Legal Backing
The circular has been issued under Section 11(1) of the SEBI Act, 1992 read with Chapter VI-C of SEBI (Mutual Funds) Regulations, 1996.
📌 What This Means for Investors
Clearer scheme positioning
Reduced duplication
Lower portfolio overlap
Better transparency
Structured glide path options for goal-based investing
Uniform naming across industry
This is one of the most comprehensive structural clean-ups of the mutual fund industry since 2017, aimed at strengthening investor trust while allowing innovation in a disciplined framework.
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