SEBI Mutual Fund Categorisation 2026: What Changes for You
- Rules
SEBI's mutual fund categorisation 2026 rules, set out in the circular "Categorization and Rationalization of Mutual Fund Schemes" dated 26 February 2026, discontinue solution-oriented schemes, create Life Cycle Funds and let one AMC offer both value and contra funds. As of October 2026, these rules are in force.
The changes matter most if you hold a retirement or children's fund, a value or contra fund, or a sectoral or thematic fund.
The circular in brief
The circular took effect on 26 February 2026. It supersedes the categorisation clause of the Master Circular for Mutual Funds dated 27 June 2024. New readers may want to start with what a mutual fund is.
Existing schemes had to meet the new rules on names, objectives, strategies and benchmarks within six months, by about 26 August 2026.
Changes from the earlier rules
| Area | Before | After (from 26 February 2026) |
|---|---|---|
| Solution-oriented funds (retirement, children's) | Open to new subscriptions | Discontinued. Existing schemes stop subscriptions immediately and are merged into a similar scheme |
| Life Cycle Funds | No separate category | New category of target-date funds, with tenure of 5 to 30 years |
| Value and contra funds | Not allowed together under one AMC | One AMC may offer both, if portfolio overlap is at most 50% |
| Sectoral and thematic funds | At least 80% in the sector or theme; no overlap limit | Stay separate categories. Overlap with other equity schemes must be at most 50% |
Source: SEBI circular dated 26 February 2026. "Before" reflects the earlier rules this circular replaces.
Solution-oriented funds are discontinued
Solution-oriented schemes, such as retirement and children's funds, are discontinued with effect from 26 February 2026. Existing schemes stop accepting subscriptions immediately. Each is to be merged into another scheme with similar asset allocation and risk profile, subject to SEBI approval.
The circular does not convert existing solution-oriented schemes into Life Cycle Funds. A merger moves your units into another scheme, so review that scheme rather than the Life Cycle Fund rules.
Life Cycle Funds form a new category
Life Cycle Funds are open-ended, target-date funds. Their equity share falls along a glide path as the maturity date approaches. Tenure runs from 5 to 30 years, in multiples of 5. An AMC may have at most six Life Cycle Funds open for subscription at a time. The maturity year goes into the fund name, as in "Life Cycle Fund 2055".
The circular gives ranges for a 30-year fund. Shorter funds start lower: a 10-year fund starts at 50% to 65% in equity, and a 5-year fund at 35% to 50%.
| Years to maturity | Equity (%) | Debt (%) | Gold/silver ETFs, ETCDs and InvITs (%) |
|---|---|---|---|
| 15 to 30 | 65 to 95 | 5 to 25 | 0 to 10 |
| 10 to 15 | 65 to 80 | 5 to 25 | 0 to 10 |
| 5 to 10 | 50 to 65 | 5 to 25 | 0 to 10 |
| 3 to 5 | 35 to 50 | 25 to 50 | 0 to 10 |
Ranges from the circular, for a 30-year fund. The last two rows, for under 3 years to maturity, are not shown here. ETCDs are exchange-traded commodity derivatives and InvITs are infrastructure investment trusts.
Debt held late in the glide path must be rated AA and above. Redemption is subject to exit loads, a charge for leaving early: 3% on exit within one year, 2% within two years and 1% within three years. The circular sets no lock-in, but these charges still reduce what you get back if you leave early.
Value and contra funds can sit under one AMC
A value fund buys shares that look cheap against their fundamentals. A contra fund takes positions against prevailing market sentiment. The circular allows one AMC to offer both, provided the portfolio overlap between the two is at most 50%. AMCs must publish category-wise overlap levels every month on their websites, so the figure is available to check.
Sectoral and thematic funds face an overlap limit
Sectoral and thematic funds remain separate categories. Each must keep its portfolio overlap with other equity schemes at 50% or less. The overlap is the quarterly average of daily overlap. It is measured against other sectoral and thematic schemes and against other equity categories, except Large Cap.
New sectoral or thematic schemes can launch only from sectors or themes on an AMFI list, which is updated every six months. A theme may combine two or more sectors, and at least 80% of the portfolio must sit in that sector or theme.
Existing schemes have three years, to about 26 February 2029, to meet the overlap limit. The excess overlap is to be reduced in shares of 35%, 35% and 30% across years one to three. Schemes that still fail must be merged.
Points that did not change
Three points are often misreported.
- ELSS was not renamed. Its category name remains "ELSS - Tax Saver Fund", with a minimum of 80% in equity. The circular makes no change to its rules. For how ELSS fits the tax regime, see whether ELSS suits the new tax regime.
- Cap definitions did not change. The circular does not redefine large, mid and small companies. It defers to the cap rules in the Master Circular.
- Allocation minimums are restated. The circular repeats the minimums for each category, such as 80% in large companies for Large Cap funds and 65% in equity for Flexi Cap funds.
Checks for investors in each affected type
Merger notices are the main event to watch. A notice should name the scheme your units move into. Compare that scheme's asset allocation and risk profile with your own goal and time horizon before you decide whether to stay. The circular does not address the tax treatment of a merger.
| If you hold | What to check | Why it matters |
|---|---|---|
| Retirement or children's (solution-oriented) fund | The merger notice: the receiving scheme's name, its asset allocation and risk profile, and whether your SIP still runs | New subscriptions have stopped, and units move into another scheme rather than a Life Cycle Fund |
| Value fund or contra fund | The category-wise overlap figure your AMC publishes monthly, if it runs both styles | One AMC may run both only while overlap is at most 50% |
| Sectoral or thematic fund | The overlap figure and any merger notice from your AMC | Existing schemes have until about 26 February 2029 to comply; those that still fail are merged |
| Life Cycle Fund (new) | The maturity year in the name, the current equity share against the glide path, and the exit load if you leave early | Exit loads of 3%, 2% and 1% apply within one, two and three years |
| ELSS fund | Nothing in the circular changes the name or rules, so check only your AMC's ordinary notices | The category name remains "ELSS - Tax Saver Fund" |
Frequently asked questions
Do solution-oriented funds turn into Life Cycle Funds?
No. The circular discontinues solution-oriented schemes from 26 February 2026 and merges existing ones into a scheme with similar asset allocation and risk profile. It does not convert them into Life Cycle Funds, which are a separate new category with their own 5 to 30 year tenure and glide path.
Was ELSS renamed under the 2026 recategorisation?
No. The category name remains "ELSS - Tax Saver Fund", with a minimum of 80% in equity, and the circular does not change its rules. If you have seen a claim that ELSS funds were renamed, the circular does not support it.
Did SEBI change the definitions of large, mid and small cap companies?
The circular does not change them. It refers back to the cap rules in the Master Circular, and the allocation minimums it restates include 65% equity for flexi cap funds and 80% in large companies for large cap funds. A fund's category therefore still follows those definitions.
Can one AMC now offer both value and contra funds?
Yes, under the circular, provided the portfolio overlap between the two is at most 50%. A value fund buys shares that look cheap against their fundamentals, while a contra fund bets against prevailing market sentiment. AMCs must publish category-wise overlap levels monthly on their websites.
Disclaimer
This article reflects the author's views as of 23 October 2026. Past performance does not indicate future returns. Examples that use assumed returns are for illustration only and are not projections. Consider your own goals and risk profile before investing.
Investment in securities market are subject to market risks. Read all the related documents carefully before investing.
The securities quoted are for illustration only and are not recommendatory.
Registration granted by SEBI, membership of BASL and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.
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