Industry Divided Over Sebi’s Plan To Link New Schemes With ₹50,000 Crore Asset Size
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India’s mutual fund industry may soon undergo a structural revamp, with the Securities and Exchange Board of India (Sebi) proposing changes to its categorisation framework. The regulator first introduced well-defined categories in 2018 to simplify investor choices, but rapid market growth and a surge in thematic schemes have raised new challenges. Sebi has now invited public comments on proposals that could reshape the industry landscape, aiming to cut duplication, curb aggressive launches, and introduce products that better reflect market realities.
In 2024 alone, more than 70 out of 180 new fund offers were thematic or sector-based, often overlapping with existing products. Sebi now proposes that no more than 50 per cent of a new fund’s portfolio can overlap with another fund in the same house. This rule would apply both to future launches and existing portfolios, which must comply within a year. Experts believe this measure could help reduce duplication and prevent investors from being overwhelmed by schemes offering little differentiation.
This proposal reflects the reality that several funds have grown exceptionally large in recent years, with over a dozen equity and hybrid schemes now crossing this threshold. Large funds sometimes struggle with agility, making it harder to buy or sell smaller companies without impacting market prices. Introducing a smaller sibling fund could give investors more choice and offer fund managers greater flexibility.
However, Sebi proposes that once an additional scheme is launched, the older scheme would stop accepting fresh inflows. Some experts argue this may unfairly disadvantage the first fund, as investors may naturally gravitate towards the newer one. They suggest giving fund houses the option to keep both funds open rather than enforcing restrictions.
For instance, in 2017, the 100th largest company was valued at about ₹30,000 crore, whereas today it is nearly ₹1 trillion. Similarly, the 250th company has grown far larger than the earlier mid-cap thresholds. Experts argue that sticking to outdated caps forces fund managers to chase a limited pool of companies, potentially inflating valuations. They suggest dynamic limits or allowing some overlap across categories to reflect the market’s growth and diversity.
For investors, lifecycle funds could provide automated rebalancing and discipline, catering to goals like retirement, home purchase, or children’s education. Fund houses may launch new lifecycle funds every five years, with existing ones merging into the nearest maturity fund once they reach their target. Experts believe this could be an attractive option for retail investors seeking simplicity and structured wealth creation.
Nonetheless, the consultation marks an important step in recalibrating the mutual fund framework to balance growth with investor safety. As assets continue to expand and participation widens, clear categorisation, responsible innovation, and stricter oversight will be crucial to maintaining trust in the industry.
Addressing The Rise Of Thematic Funds
One of Sebi’s key concerns has been the unchecked rise of thematic and sectoral funds. While fund houses were restricted to one scheme per category in traditional spaces like large-cap or flexi-cap funds, no such cap was applied to thematic funds. This led to a flood of new launches around ideas such as defence, tourism, electric vehicles, and innovation.In 2024 alone, more than 70 out of 180 new fund offers were thematic or sector-based, often overlapping with existing products. Sebi now proposes that no more than 50 per cent of a new fund’s portfolio can overlap with another fund in the same house. This rule would apply both to future launches and existing portfolios, which must comply within a year. Experts believe this measure could help reduce duplication and prevent investors from being overwhelmed by schemes offering little differentiation.
Rethinking The One-Scheme Rule
Sebi is also revisiting its “one-scheme-per-category” rule. Currently, fund houses cannot launch more than one scheme in the same category. The regulator now suggests allowing an additional scheme if the existing one has completed five years and its assets under management exceed ₹50,000 crore.This proposal reflects the reality that several funds have grown exceptionally large in recent years, with over a dozen equity and hybrid schemes now crossing this threshold. Large funds sometimes struggle with agility, making it harder to buy or sell smaller companies without impacting market prices. Introducing a smaller sibling fund could give investors more choice and offer fund managers greater flexibility.
However, Sebi proposes that once an additional scheme is launched, the older scheme would stop accepting fresh inflows. Some experts argue this may unfairly disadvantage the first fund, as investors may naturally gravitate towards the newer one. They suggest giving fund houses the option to keep both funds open rather than enforcing restrictions.
Expanding The Market-Cap Universe
Another debated issue is whether Sebi’s rigid market-cap definitions still reflect India’s evolving markets. Under current rules, large-cap funds must invest in the top 100 companies, mid-cap funds in the next 150, and small-caps in the next 250. But with the rapid growth of listed companies, these boundaries are proving restrictive.For instance, in 2017, the 100th largest company was valued at about ₹30,000 crore, whereas today it is nearly ₹1 trillion. Similarly, the 250th company has grown far larger than the earlier mid-cap thresholds. Experts argue that sticking to outdated caps forces fund managers to chase a limited pool of companies, potentially inflating valuations. They suggest dynamic limits or allowing some overlap across categories to reflect the market’s growth and diversity.
Lifecycle Funds For Goal-Based Investing
Sebi has also proposed introducing lifecycle funds to encourage long-term, goal-based investment. These funds would function as fund-of-funds with fixed target dates ranging from 10 to 30 years. Their portfolios would gradually shift from equities to hybrid instruments and finally to debt as the target date nears.For investors, lifecycle funds could provide automated rebalancing and discipline, catering to goals like retirement, home purchase, or children’s education. Fund houses may launch new lifecycle funds every five years, with existing ones merging into the nearest maturity fund once they reach their target. Experts believe this could be an attractive option for retail investors seeking simplicity and structured wealth creation.
Balancing Investor Protection And Innovation
While Sebi’s proposals aim to reduce clutter, protect investors, and keep pace with market realities, some industry voices caution that too many restrictions could stifle innovation. For instance, forcing new schemes to mirror existing ones may reduce variety, whereas allowing differentiated strategies within categories could better serve investor needs.Nonetheless, the consultation marks an important step in recalibrating the mutual fund framework to balance growth with investor safety. As assets continue to expand and participation widens, clear categorisation, responsible innovation, and stricter oversight will be crucial to maintaining trust in the industry.
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