SEBI New Mutual Fund Classification Rules 2026: 13 Equity Categories, Higher Allocations & Overlap Limits Explained

SEBI's New Equity Mutual Fund Classification Rules 2026: Everything Investors Need to Know

The Securities and Exchange Board of India (SEBI) has issued a comprehensive new circular on the Categorisation and Rationalisation of Mutual Fund Schemes dated February 26, 2026. The revised framework replaces earlier classification guidelines and introduces significant changes to equity mutual fund categories, portfolio overlap rules, and scheme naming norms. Here is a complete breakdown of what has changed and what it means for investors.

Higher Mandatory Equity Allocations for Key Fund Categories

One of the most impactful changes is the upward revision in the minimum equity allocation for several popular fund categories. Four categories — Dividend Yield, Value, Contra, and Focused Funds — previously required a minimum equity investment of 65%. Under the new rules, all four must now invest a minimum of 80% of total assets in equity. This tightening is designed to ensure that funds in these categories genuinely reflect their stated investment mandate.

Stricter Portfolio Overlap Rules

SEBI has introduced mandatory portfolio overlap limits to reduce duplication across mutual fund schemes. For sectoral and thematic equity funds, no more than 50% of a scheme's portfolio can overlap with other equity schemes in the sectoral or thematic category, or with other equity scheme categories (except large-cap schemes).

Crucially, this overlap condition must now be computed on a quarterly basis, using the average of daily portfolio overlap values over the quarter — a requirement that did not exist previously. Existing sectoral and thematic schemes have been given 3 years to comply with the new overlap limits. Any scheme that fails to meet the criteria after this period will be mandatorily merged with other eligible schemes.

AMCs Can Now Offer Both Value and Contra Funds

Under the previous framework, a mutual fund house could offer either a Value Fund or a Contra Fund — not both. The new rules remove this restriction. Fund houses can now run both a Value Fund and a Contra Fund simultaneously, provided the portfolio overlap between the two schemes does not exceed 50%. This gives asset managers greater flexibility while still ensuring meaningful differentiation between the two strategies.

13 Equity Scheme Categories — Up from 11

The new circular expands the number of recognised equity mutual fund scheme types from 11 to 13. The key structural change is the separation of Sectoral and Thematic Funds, which were previously grouped together into a single category. Additionally, the ELSS scheme has been renamed to ELSS-Tax Saver Fund for greater clarity. The complete list of 13 equity scheme categories is as follows:

• Multi Cap Fund: Minimum 25% each in large, mid, and small-cap stocks.
• Large Cap Fund: Minimum 80% in large-cap equity instruments.
• Large & Mid Cap Fund: Minimum 35% in large-caps and 35% in mid-caps.
• Mid Cap Fund: Minimum 65% in mid-cap companies.
• Small Cap Fund: Minimum 65% in small-cap companies.
• Flexi Cap Fund: Minimum 65% in equity across market caps.
• Dividend Yield Fund: Minimum 80% in dividend-yielding stocks (up from 65%).
• Value Fund: Minimum 80% in equity following a value strategy (up from 65%).
• Contra Fund: Minimum 80% in equity following a contrarian strategy (up from 65%).
• Focused Fund: Maximum 30 stocks; minimum 80% in equity (up from 65%).
• Sectoral Fund: Minimum 80% in equity of a specific sector.
• Thematic Fund: Minimum 80% in equity of a specific theme (can span two or more sectors).
• ELSS-Tax Saver Fund: Minimum 80% in equity (renamed from "ELSS").

New Category: Life Cycle Funds Introduced

A brand-new scheme classification called Life Cycle Funds has been introduced, replacing the earlier "Solution-Oriented Schemes" category. A Life Cycle Fund follows a glide path strategy, dynamically allocating assets across equity, debt, InvITs, ETCDs, Gold ETFs, and Silver ETFs based on the investor's stage of life or investment horizon. This is particularly relevant for long-term retirement or goal-based investing.

Uniform Naming Norms

The new circular also mandates that all mutual fund schemes adhere to uniform naming conventions. Importantly, fund names must not emphasise or imply potential returns. This is aimed at curbing misleading marketing practices and improving transparency in how products are presented to retail investors.

What This Means for Investors

According to industry experts, the new classification framework is a meaningful step toward simplifying a mutual fund landscape that has grown increasingly complex. By enforcing stricter asset allocation boundaries and reducing portfolio overlap, SEBI is ensuring that schemes genuinely reflect their stated investment objectives. This should improve comparability, transparency, and informed decision-making for retail investors navigating the mutual fund universe.

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Categories: new equity fund categories, SEBI mutual fund circular, SEBI mutual fund classification 2026