Sebi, the market regulator, issued a consultation paper proposing changes to the scheme categorization process, the financial instruments in which each fund can invest, and whether fund houses should be allowed to launch solution-oriented schemes.

The Sebi is also considering allowing fund houses to launch sectoral debt funds, similar to sectoral equity funds.

Key Highlights

• SEBI allows AMCs to launch both value and contra funds with maximum 50% portfolio overlap.
• Equity and debt schemes’ residual allocation may now include debt, gold, silver, REITs, InvITs—broad diversification. 

If the proposals are approved, the majority of the schemes will be able to invest some of their funds in REITs and InvITs. The nomenclature of mutual fund schemes may also change as fund tenures, such as 3-5 years and 7-10 years, are included in scheme names, in addition to current names such as medium term fund, long term fund, and so on.

According to Sebi, one of the proposals is to allow fund houses to offer solution-oriented life cycle fund of funds (FoFs) with lock-in periods for specific goals such as retirement, housing, marriage, and so on. A solution-oriented open-ended FoF with a target date could have a variety of structures, according to the Sebi paper.

For example, a Retirement Life Cycle FoF with a target maturity date of 2055 (a 30-year tenure) will invest in equity funds for the first 24 years before shifting to hybrid funds for the next three years. During the final three years of its tenure, it will invest in debt funds.

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Sebi is also asking the public whether such solutions-oriented life cycle FoFs should have different lock-in periods, such as three, five, or ten years. "However, the said lock-in period would not be applicable to any existing investment by an investor, registered SIPs, and incoming STPs in existing solution-oriented schemes as of the date on which such scheme is realigned with these provisions," Sebi stated.

According to Sebi, if its proposals are approved, each scheme's investment objectives, investment strategies, and benchmarks will be modified to align with the schemes' categories.

The regulator would also allow fund houses to launch new schemes within the existing scheme categories if they met certain criteria.