Review: SEBI's Draft Circular on Revised MF Categorization Rules
Last Update Date: 05-10-2026
Published by freefincal
Abhishek Kumar's role: Wrote this article
Abhishek Kumar wrote this review of SEBI's draft categorisation rules, noting the overlap limits could curb false diversification but cautioning that allowing second schemes in a category could leave long-time investors in shrinking older funds.
What Abhishek Kumar said
What is 'false diversification' in mutual funds?
It is holding several funds that look different on the label but own largely the same stocks. Active managers are judged against their peers, and drifting too far from the pack risks losing investors to whoever is ahead this quarter, so portfolios converge. An investor who buys three such funds believes they are spreading risk when they are really taking a second and third helping of the same dish. That overlap was one of the problems SEBI's July 2025 draft on scheme categories set out to address.
What did SEBI's July 2025 draft propose on overlap between schemes?
The draft proposed letting a fund house run both a value and a contra scheme, which it could not then, provided their portfolios overlapped by no more than half. A similar 50 per cent cap was proposed for sectoral and thematic schemes against others in their category, checked at launch and every six months, with 30 working days to correct a breach or an exit without load for investors. I thought this part was sound. SEBI issued its final rules in February 2026, keeping the overlap caps.
What worried you about the draft's rule on a second scheme in the same category?
The draft would have allowed a second scheme once the first was over five years old and above ₹50,000 crore, with the older scheme closed to new money. That leaves the original facing only redemptions: its manager may have to sell at poor moments, and fixed costs fall on a shrinking base, so continuing investors pay for the newcomers' clean slate. It could also hand a large scheme with a weak record a fresh start while the fund house keeps earning fees on the old one. That was my concern at the time.
In our words, from what he said in the piece. General information, not personal advice.
More of Abhishek's views on money management
A review of SEBI's draft circular on revising mutual fund categorisation rules. It covers proposed portfolio overlap limits between value, contra and thematic funds, a relaxation of the one-scheme-per-category rule for large, older schemes, and wider options for parking cash, and weighs the risks for existing investors.
Publisher source
Review: SEBI's Draft Circular on Revised MF Categorization Rules