SEBI new rules for mutual funds 2026
- Apr 8
- 7 min read
Updated: Jul 12
If you have been investing in mutual funds for a while, you have probably grown accustomed to one central number: the Total Expense Ratio (TER). It sat there on fund factsheets and comparison websites, a single percentage that most investors used as a proxy for what a fund costs.
SEBI, the Securities and Exchange Board of India, has rolled out a comprehensive new regulatory framework that fundamentally changes how mutual funds are structured, priced, and governed in India. The new framework complements rules across categories including Large Cap Fund mandates and represents the most significant overhaul since the 2017 categorisation circular.
In this article, we walk you through all the major changes, explain what they mean for your existing investments, and outline what, if anything, you need to do differently.
The SEBI (Mutual Funds) Regulations, 1996 served the Indian investment ecosystem for nearly three decades. A lot changed in that time: AUM grew from a few thousand crore to over Rs 65 lakh crore, investor folios multiplied to over 22 crore, and product sophistication advanced dramatically.
SEBI’s stated objectives with the new framework are threefold: stronger investor protection, better transparency on costs, and more rigorous governance standards for AMCs.
The earlier regulations ran to 162 pages and approximately 67,000 words. The new framework is more streamlined, consolidating scattered circulars and guidelines into a single, cleaner structure.
The biggest change: A new way to look at costs
If there is one change that every mutual fund investor needs to understand right now, it is the separation of the Total Expense Ratio into its constituent components.
For most investors, this single percentage was shorthand for what the fund costs to run. But the TER actually bundles together very different types of costs: the management fee paid to the fund manager, the distribution commission paid to agents and distributors, and a range of operational and transaction costs.
From April 2026, SEBI requires AMCs to separate these components clearly. At the top level, the new framework distinguishes between the Management and Advisory Fee, the Operating and Administrative Expenses, and Distribution Charges (commissions to distributors in regular plans only).
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Brokerage costs, STT, stamp duty, GST, and exchange fees are now required to be explicitly disclosed rather than being quietly absorbed into the NAV or the TER.
What this means for you: The new structure does not necessarily mean your total cost will go up. What it does mean is that you will now see a clearer breakdown of where every rupee of cost is going. The BER limits for equity funds have also been revised downward, which means the fund management fee component is expected to be lower for many schemes. However, the statutory levies will be shown on top, so do not compare the old TER directly to the new BER when evaluating costs. |
SEBI has also significantly lowered the brokerage limits that fund houses are permitted to pay when trading their portfolios. Previously, equity fund managers could pay up to 12 basis points in brokerage per transaction. The new limit is substantially lower.
Additionally, the earlier allowance of an extra 5 basis points for schemes with more than 30% of inflows from B30 cities has been removed. This compounding effect was meaningful for funds actively targeting smaller cities; now it no longer applies.
Performance-linked fees: An optional new model
One of the more interesting structural innovations in the new regulations is the introduction of an optional performance-linked fee model for actively managed equity funds.
The idea behind performance-linked fees is to better align the interests of the fund manager with the investor. Under this model, the fund can charge a lower base management fee but earn additional fees if and when it outperforms its benchmark by a specified margin.
Key safeguards include the requirement that the performance formula be disclosed upfront in the Scheme Information Document, that the benchmark used must be the fund’s official benchmark, and that underperformance periods must result in fee clawbacks.
High water mark protections are also expected to be incorporated, so investors do not pay performance fees on gains that merely recover prior losses.
A word of caution: Performance-linked fee models can be attractive on paper but complex in practice. Before investing in a scheme that uses this model, read the SID carefully and understand exactly how the fee is calculated, what benchmark is being used, and what investor protections are in place. |
Fund categorisation gets a major refresh
Alongside the regulations overhaul, SEBI also issued a new circular in February 2026 that significantly updated the categorisation framework first introduced in 2017.
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The most consequential change for investors is the increase in mandatory minimum allocation thresholds for equity-oriented categories.
Under the new rules, this floor has been raised to 80% for categories including large cap, mid cap, small cap, large and mid cap, multi cap, and flexi cap funds. The remaining 20% of the portfolio may be invested at the fund manager’s discretion.
Previously, the non-equity allocation was largely confined to debt and money market instruments. Now, gold, silver, REITs, InvITs, and overseas securities are explicitly permitted within that 20% sleeve, giving fund managers significantly more flexibility to construct diversified portfolios.
Stricter rules on portfolio overlap
If you have ever wondered whether two different mutual funds from the same fund house are really different investments, the new rules address this directly.
This sometimes led to a practice informally called closet indexing, where actively managed funds held portfolios very similar to the index while charging active management fees. SEBI has moved to address this structurally.
From 2026, SEBI has introduced a strict 50% portfolio overlap cap for sectoral and thematic funds within the same category. If two sectoral funds from the same AMC have more than 50% of their stocks in common, one must be restructured or merged.
This calculation will be done on a quarterly basis using daily portfolio data, with AMCs required to disclose and remediate overlaps within three months of detection.
The same fund house is also now allowed to offer both a Value Fund and a Contra Fund, which was previously a grey area. Both are now explicitly recognised as distinct categories with different investment mandates.
Life cycle funds replace solution-oriented schemes
One of the more quietly significant changes in the new classification framework is the replacement of Solution-Oriented Schemes with a new category called Life Cycle Funds.
Life Cycle Funds follow a glide path strategy, which means the asset allocation automatically shifts from more aggressive (equity-heavy) to more conservative (debt-heavy) as the investor ages or as the target date approaches.
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For investors saving for retirement or a specific long-term goal, these Life Cycle Funds offer a disciplined, automated approach to de-risking the portfolio. They also have a risk profile appropriate for goal-based planning.
What has changed for equity savings funds
Equity Savings Funds have also seen an important structural change. SEBI has introduced a requirement that at least 15% of the portfolio must be invested in pure equity (non-arbitrage), ensuring these funds genuinely offer equity upside rather than functioning primarily as enhanced arbitrage vehicles.
Sectoral debt funds: A new category
Among the genuinely new product categories introduced under the 2026 framework is the Sectoral Debt Fund, a debt fund that will focus its lending on specific sectors, for example, infrastructure bonds, MSME credit, or renewable energy financing. Sectoral Debt Funds carry the credit risk associated with the underlying sector but offer higher yields than generic debt funds.
Governance and trustee responsibilities get stricter
The new regulations also significantly strengthen governance requirements for AMCs. For investors, this is a positive development. Stronger governance at the AMC level means more accountability, better disclosure, and a higher bar for how fund managers conduct themselves.
How existing AMCs are responding
The transition to the new framework has already begun. Several leading fund houses including HDFC Mutual Fund, ICICI Prudential, and Mirae Asset have begun issuing investor communications about changes to specific schemes. Investors should look out for addendum communications that outline any changes to investment objectives, fee structures, or portfolio composition.
What should you do as an investor?
The honest answer is that for most investors, no immediate action is required. The core logic of your investment strategy, invest regularly, stay diversified, choose low-cost direct plans, and maintain a long-term horizon, remains unchanged.
Take note of any communication your AMC sends regarding changes to your specific schemes. If any scheme is being merged, reclassified, or significantly restructured, the communication will explain your options.
The performance-linked model is more complex, and it is worth understanding how the fee structure works for any fund you hold that adopts this model.
Disclaimer
Disclaimer :This article is published for educational and informational purposes only. It does not constitute investment advice, a recommendation to buy or sell any mutual fund scheme, or a solicitation of any kind. Mutual fund investments are subject to market risks. Please read all scheme-related documents carefully before investing. Past performance is not indicative of future returns. This content is based on SEBI regulations and circulars available as of April 2026.
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