India's markets regulator on Thursday rolled out tougher mutual fund rules, tightening category definitions and capping portfolio overlap to ensure schemes stay "true-to-label" and curb duplication.
The thematic funds have three years to comply, while the others have six months.
Under the revised framework, the Securities and Exchange Board of India has expanded the number of mutual fund categories from 36 to 40, comprising 13 equity, 17 debt, seven hybrid, two under the "other" bucket (index funds, ETFs and fund of funds) and one life cycle category.
SEBI has also set strict limits on portfolio overlap, particularly for sectoral and thematic funds, as well as value and contra funds.
Asset managers may continue to offer both value and contra schemes, but the overlap between the two portfolios cannot exceed 50%.
For thematic equity schemes, SEBI requires that no more than 50% of a scheme's portfolio overlaps with other thematic schemes and other equity categories, except large-cap schemes.
"The regulator isn't just policing labels anymore, it's putting a ruler on portfolios, making the schemes true-to-label," said Aishvarya Dadheech, founder and chief investment officer at Fident Asset Management.
SEBI has also standardised the method of measuring overlap. It will now be calculated on quarterly basis, using the average of daily portfolio overlap values over the period.
"This is a major shift from labelling to clear demarcation and will reduce duplicate funds within the same AMC, making it harder to run multiple schemes that are essentially the same portfolio with different names," Dadheech said.
The regulator further tightened naming conventions, requiring scheme names to match their category. Asset managers must also publish monthly category-wise overlap disclosures on their websites - equity vs equity, debt vs debt, and hybrid vs hybrid.
SEBI discontinued solution-oriented schemes with immediate effect, instructing existing schemes to stop subscriptions and merge into a similar scheme with its approval.
The updated framework also sets a minimum 80% equity allocation for dividend yield, value and contra funds, and introduces new structures such as life cycle funds and sectoral debt funds.