The Securities and Exchange Board of India (SEBI) has issued a draft circular proposing a significant overhaul of the rules governing mutual fund schemes. The proposed changes, which are aimed at enhancing investor clarity and enabling product innovation, could have a major impact on the Indian mutual fund industry.

One of the most significant proposals is to allow Asset Management Companies (AMCs) to launch a second scheme in the same category, a move that could offer more choices to investors but also raises questions about product differentiation.

The draft circular, which has been released for public consultation, includes 20 proposals across all major fund categories, including equity, debt, and hybrid schemes. Here’s a breakdown of the key changes SEBI is considering.

A Second Chance for Popular Schemes

In a major shift, SEBI has proposed allowing AMCs to launch an additional scheme within an existing mutual fund category. However, there are some strict conditions: * The original scheme must be at least five years old. * The original scheme must have an AUM of over Rs 50,000 crore. * The new scheme must have a similar investment objective and strategy. * Once the new scheme is launched, the original scheme must stop accepting new subscriptions.

This proposal is designed to allow AMCs to continue to offer popular strategies without having a single scheme become too large to manage effectively.

Tighter Rules on Portfolio Overlap

To ensure that schemes remain "true-to-label," SEBI has also proposed tighter limits on portfolio overlap. The regulator noted that in some cases, there was a significant overlap in the portfolios of different schemes from the same fund house, which could confuse investors.

The new proposals include: * Allowing both a Value and a Contra fund within the same fund house, but only if the overlap in their holdings does not exceed 50%. * Seeking feedback on whether a 50% overlap limit is sufficient for sectoral and thematic equity schemes to ensure they remain distinct.

Standardizing Scheme Names

To make it easier for investors to understand what they are buying, SEBI has proposed standardizing the names of debt fund schemes. This includes: * Changing the term “Duration” to “Term” in fund names. * Renaming “Low Duration Funds” to “Ultra Short to Short Term Funds.” * Potentially including the investment tenure in the scheme name, for example, “Medium Term Fund (3–4 years).”

Other Key Proposals

The draft circular also includes several other important proposals: * Sectoral Debt Funds: AMCs may be allowed to launch sectoral debt funds, with specific rules on portfolio overlap and sectoral exposure limits. * Hybrid and Arbitrage Funds: Arbitrage Funds may be allowed to have limited exposure to short-term government securities. Equity Savings Schemes may be required to maintain a net equity and arbitrage exposure of 15%–40%. * Index and ETF Framework: A separate framework will be introduced to address the risk of too many similar index funds and ETFs being launched.

The draft circular is open for public comments until August 8, 2025. For the latest updates on these proposals and other market news, be sure to follow TheAIBull.com.