Thread by @ETMONEY

SEBI just proposed sweeping changes to mutual funds.

These will make mutual funds easier to understand and safer to invest in.

Here are the 8 big changes that could redefine mutual funds as we know them.🧵👇

Over time, mutual funds have gotten a little crowded.

Funds with different names often ended up doing the same thing. And for the average investor, navigating this landscape is a nightmare.

SEBI noticed and is now stepping in to fix it.

Here’s what it proposes to change.👇

1. Fund houses can offer both Value & Contra funds

Until now, fund houses were allowed to offer either a Value fund or a Contra fund, not both.

The reason: While these funds follow different investment styles on paper, in reality, many ended up holding the same set of stocks.

SEBI now proposes to allow both Value and Contra funds, but with one condition.

The portfolio overlap between the two schemes must not exceed 50% at any point.

This will be monitored at the time of the fund’s launch. Then, every six months, based on the month-end portfolios.

If the overlap exceeds the 50% threshold, the AMC must rebalance the portfolios within 30 business days.

In exceptional cases, the AMC can get an extension of another 30 days.

If the deviation continues, investors in both schemes must be offered an exit without any exit load.

2. AMCs Can Launch a 2nd Scheme in the Same Category

Currently, mutual fund houses can offer only one scheme per category. One large cap, one mid cap, one multicap, and so on.

However, SEBI plans to allow AMCs to launch a second scheme, but with strict guardrails.

A second scheme can be launched only if:

-The existing scheme is over 5 years old

-It has more than ₹50,000 crore AUM

-The second scheme follows a similar strategy

However, once the new scheme is launched, the existing one must stop accepting fresh subscriptions.

The total expense ratio of the new scheme cannot exceed the last disclosed TER of the old one.

This ensures that the second scheme is not used to charge more or to launch a weaker clone of a successful fund.

3. Clear Terminology for Debt Schemes

Debt funds have technical names like “Low Duration” or “Long Duration”, which few investors truly understand.

SEBI wants to make this simpler and more intuitive.

It suggests replacing “Duration” with “Term” in all debt fund names.

SEBI also proposed that the name of every debt scheme should clearly indicate its investment horizon.

For example: “Medium Term Fund (3–4 years)” instead of “Medium Duration.”

So instead of guessing which fund suits your time frame, the name will now tell you.

4. Introduction of Sectoral Debt Schemes

SEBI has proposed creating a new category of sectoral debt scheme, similar to equity sector funds.

These would be debt schemes that invest in a single sector, infra, banking, PSUs, but within a strict framework.

Key conditions include:

– Minimum 80% allocation to that sector
– Minimum credit quality: AA+ and above
– No more than 60% portfolio overlap with any other debt scheme

This ensures that these funds offer focused exposure without compromising on safety or liquidity.

5. Limited Portfolio Overlap in Thematic/Sectoral Funds

SEBI has observed that many sectoral and thematic funds, despite being marketed as unique ideas, end up looking similar in practice.

It now proposes a 50% overlap restriction between them. (except Large Cap).

If two funds in the same AMC have more than half their portfolios in common, one of them must change, or give you an exit option.

All existing thematic and sectoral funds must comply with this within one year of the rule taking effect.

6. Freedom To Add gold, silver and REITs

Every scheme has a minimum investment mandate. For instance, equity schemes must invest at least 65% in equities.

The remaining part of the portfolio is called the “residual portion.”

SEBI wants to give fund managers more flexibility in deploying it.

Under the proposal, this residual portion can now be invested in:

-Debt and money market instruments
-Gold and silver
-REITs and InvITs

This applies to equity, debt, hybrid, and solution-oriented schemes, except for specific short-duration categories (e.g. Overnight, Liquid).

The idea is to let fund managers manage liquidity and returns efficiently without compromising the core mandate of the fund.

7. Goal-Based Life Cycle Funds of Funds

SEBI has proposed a new solution-oriented product: Life Cycle FoFs.

These would be open-ended FoFs with a target date and optional lock-in, designed for goals like retirement, housing etc.

The portfolio will follow a glide path.

For example, a Retirement Life Cycle FoF maturing in 2055 (30-year tenure) will:

-Invest fully in equity funds for the first 24 years

-Switch to hybrid funds for the next 3 years

-Move to debt funds for the final 3 years

On maturity, funds can be merged with the next nearest maturity scheme, with investors’ consent.

Investors would also be offered different lock-in periods, such as 3, 5, or 10 years, depending on the financial goal.

8. Debt Exposure of Arbitrage Funds

Currently, arbitrage funds can invest in both equity and debt. But the nature of this debt isn’t strictly defined.

SEBI now wants to restrict this debt exposure to:

-Government securities with a maturity of < 1 year
-Repos backed by government bonds

Other Key changes

SEBI proposes that all equity savings schemes must keep both net equity and arbitrage exposure between 15% and 40%.

Also, all schemes must drop the word 'Fund' from their names and use 'Scheme' instead to reduce investor confusion.

Despite all these changes, SEBI keeps the 5 master categories intact:

Equity, Debt, Hybrid, Solution-oriented, Others

But the categories now have sharper lines, clearer language, and stricter oversight.

SEBI has invited Public comments on this till August 8.

Which proposed change do you think was long needed?

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https://x.com/ETMONEY/status/1946960603538485582