Description

SEBI supersedes its 2017 and 2020 mutual fund categorization circulars, introducing updated scheme classifications covering Equity, Debt, Hybrid, Life Cycle Funds, and Other Schemes including ETFs and Fund of Funds.

Summary

SEBI has issued a comprehensive circular (HO/24/13/15(2)2026-IMD-RAC4/I/5764/2026) dated February 26, 2026, superseding Clause 2.6 of Chapter 2 of the Master Circular for Mutual Funds (June 27, 2024). The revision updates the categorization and rationalization framework for Mutual Fund Schemes to accommodate the evolving investment landscape and emerging asset class opportunities.

Key Points

  • Supersedes SEBI circulars dated October 06, 2017 and November 06, 2020 on mutual fund categorization, as consolidated in the Master Circular for Mutual Funds (June 27, 2024)
  • Mutual Fund Schemes are broadly classified into five groups: Equity Schemes, Debt Schemes, Hybrid Schemes, Life Cycle Funds, and Other Schemes
  • Other Schemes include Fund of Fund Schemes and Passive Schemes (Index Funds / ETFs)
  • ‘Residual portion’ is defined as the part of a scheme’s corpus not invested in its main, core asset classes
  • Hybrid Schemes now explicitly include InvITs and commodities-related instruments in addition to equity and debt
  • Detailed minimum investment thresholds defined for each equity sub-category

Regulatory Changes

The updated Clause 2.6 introduces revised scheme categories, characteristics, and uniform descriptions:

Equity Schemes (selected sub-categories):

  • Multi Cap Fund: Minimum 75% in equity; at least 25% each in large cap, mid cap, and small cap stocks
  • Large Cap Fund: Minimum 80% in large cap equity instruments
  • Large & Mid Cap Fund: Minimum 35% each in large cap and mid cap equity instruments
  • Mid Cap Fund: Minimum 65% in mid cap equity instruments
  • Small Cap Fund: Minimum 65% in small cap equity instruments
  • Flexi Cap Fund: Minimum 65% in equity and equity-related instruments (no cap-size restriction)
  • Dividend Yield Fund: Minimum 80% in equity; must predominantly invest in dividend-yielding stocks
  • Value Fund: Minimum 80% in equity; must follow a value investment strategy
  • Contra Fund: Must follow a contrarian investment strategy

Hybrid Schemes: Now defined as schemes investing in a mix of asset classes including equity, debt, InvITs, and commodities-related instruments as permitted by SEBI.

Compliance Requirements

  • All Mutual Funds must realign existing schemes to conform to the updated categories and scheme characteristics
  • Asset Management Companies (AMCs) must ensure scheme names and uniform descriptions match the revised framework
  • Trustee Companies / Board of Trustees must oversee compliance with updated categorization norms
  • AMFI is directed to disseminate the circular to all member AMCs and ensure industry-wide adoption
  • Any scheme that no longer fits its current category under the new norms must be re-categorized or merged per SEBI guidelines

Important Dates

  • Circular Date: February 26, 2026
  • Effective Date: Immediately upon issuance (February 26, 2026); specific transition timelines for existing schemes may be communicated separately by SEBI/AMFI
  • Previous circulars (October 06, 2017 and November 06, 2020) and Clause 2.6 of the Master Circular for Mutual Funds (June 27, 2024) stand superseded

Impact Assessment

This circular has broad and significant impact across the Indian mutual fund industry:

  • AMCs: Must review and potentially restructure existing fund offerings to comply with revised minimum investment thresholds and scheme characteristics; may trigger scheme mergers or re-categorizations
  • Investors: Improved clarity and uniformity in scheme descriptions aids informed decision-making; some existing fund mandates may shift
  • Industry Structure: Inclusion of InvITs and commodities in Hybrid Schemes reflects SEBI’s intent to broaden permissible asset classes, enabling more diversified product offerings
  • Passive Investing: Explicit recognition of Index Funds and ETFs under ‘Other Schemes’ reinforces regulatory support for passive investment vehicles
  • Distributors & Advisors: Must update product knowledge and client disclosures to reflect revised categorization and uniform scheme descriptions

Impact Justification

This circular supersedes foundational 2017 and 2020 SEBI circulars on mutual fund categorization, effectively reshaping scheme classification norms for the entire Indian mutual fund industry. All AMCs, Trustees, and AMFI must comply with revised scheme characteristics and uniform descriptions.