SEBI’s Mutual Fund Overhaul is Final

SECTION 01
What Changed from Draft to Final — Why It Matters

SEBI issued the draft consultation paper in July 2025. The final circular issued on February 26, 2026 is meaningfully different. If your team has been tracking the draft, here is what shifted:

SECTION 02
What the Final Circular Actually Requires

Equity Schemes — 13 Categories, Higher Floors, Stricter Overlap

• Framework expanded from 11 to 13 equity categories — Sectoral and Thematic funds are now separate categories.

• Equity allocation floor raised to 80% for Value, Contra, Focused, and Dividend Yield Funds (was 65% in the draft).

• Value + Contra funds may both be offered by the same AMC, with a 50% max portfolio overlap at all times.

• Sectoral/Thematic schemes: max 50% overlap with other equity schemes (large cap excluded). Existing schemes have 3 years to comply. Non-compliant after 3 years must mandatorily merge.

• Overlap monitoring: quarterly, using daily portfolio values averaged over the quarter.

• New obligation: AMCs must publish portfolio overlap data publicly on their websites every month from April 1.

Debt Schemes — Renaming + New Sectoral Category

• "Duration" renamed to "Term" across all duration-based funds.

• "Low Duration Fund" renamed to "Ultra Short to Short Term Fund" (6–12 months Macaulay duration, unchanged).

• New: Sectoral Debt Fund — min 80% in AA+ bonds of a specific sector, max 60% overlap with other debt schemes.

• REITs/InvITs now permitted as residual deployment in all debt schemes except Overnight, Liquid, Ultra-Short, and Money Market Funds.

Hybrid Schemes — Two Key Tightenings

• Arbitrage Fund debt exposure restricted to G-secs (<1yr) and G-sec repos only — no corporate bonds.

• Equity Savings Fund net equity mandated at 15%–40% of total assets.

Solution-Oriented Schemes — Discontinued

• Retirement Fund and Children's Fund categories no longer exist in the final circular.

• AMCs must merge or reclassify existing schemes into approved categories within the transition window prescribed by SEBI..

Life Cycle Funds — New Category

• Open-ended FoFs with a target date (2035 through 2055). Automatic glide path: equity-heavy early, shifting to hybrid then debt as maturity approaches.

• Minimum tenure options start at 5 years (in 5-year increments, up to 30 years). Early redemptions are subject to graded exit loads..

Additional Scheme Framework

• SEBI allows AMCs meeting specified age and AUM criteria to launch an additional scheme in the same category, subject to the conditions prescribed in the circular.

• Same objective, strategy, and asset allocation. Existing scheme stops accepting new subscriptions on launch. Max 2 schemes per category per AMC.

SECTION 03
How ComplianceOS Handles This

This circular creates three categories of compliance burden for AMCs. Each one is hard to manage manually — and each one is exactly what ComplianceOS was built for.

Quarterly Overlap Monitoring — with Daily Data

The 50% cap must be computed quarterly using daily portfolio overlap values averaged over the quarter. That is not a spreadsheet job — it is a data pipeline. ComplianceOS automates the computation, flags breaches in real time, triggers the rebalancing workflow, and maintains a clause-mapped audit trail ready for supervisory review.

Monthly Public Disclosures

AMCs must publish overlap data on their websites every month. ComplianceOS schedules, generates, and archives these disclosures automatically — with evidence tied directly to the SEBI clause requiring them. No manual chase, no missed months.

Scheme Reclassification & SID Rewrites

Discontinuation of Retirement / Children's Funds, renaming of Duration → Term funds, raised equity thresholds, separation of Sectoral/Thematic categories — each change touches SIDs, KIMs, advertisements, and regulatory filings. ComplianceOS's AI Library Amendments module tracks every change with version history, side-by-side comparisons, and clause-level attribution across all documents.