SEBI new rules for mutual funds 2026
- Apr 8
- 10 min read
Updated: Apr 10
If you have been investing in mutual funds for a while, you have probably grown familiar with terms like Total Expense Ratio, Large Cap Fund, and ELSS. But from April 1, 2026, the rules governing all of these have changed, and changed significantly.
SEBI, the Securities and Exchange Board of India, has rolled out a comprehensive new regulatory framework called the SEBI (Mutual Funds) Regulations, 2026, replacing a structure that had been in place since 1996. This is not a minor update. It is the most sweeping overhaul of mutual fund regulations in nearly thirty years, and understanding it could make a meaningful difference to how you invest going forward.
In this article, we walk you through all the major changes, explain what they mean in plain language, and help you think through how these new rules might affect your existing investments and future decisions. Whether you are a first-time SIP investor or a seasoned wealth builder, this one is worth reading carefully.
The SEBI (Mutual Funds) Regulations, 1996 served the Indian investment ecosystem well for nearly three decades. But the mutual fund industry of 2026 looks almost nothing like the one that existed in the mid-nineties. Assets under management have grown from a few thousand crores to over sixty lakh crores. The number of retail investors has multiplied many times over. New product categories have emerged, and investor expectations around transparency and governance have risen sharply.
SEBI's stated objectives with the new framework are threefold: stronger investor protection, greater transparency in how mutual funds charge investors, and better alignment between the incentives of Asset Management Companies (AMCs) and the long-term financial outcomes of their investors. The regulator has also significantly streamlined the regulatory text itself.
The earlier regulations ran to 162 pages and approximately 67,000 words. The new framework has been condensed to 88 pages and around 31,000 words, eliminating most provisos and making compliance easier for fund houses and easier to read for everyone else.
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 shift in how the Total Expense Ratio (TER) is structured. Under the old rules, the TER was a single, all-in figure that bundled together the fund management fee, brokerage costs, taxes like Securities Transaction Tax (STT), stamp duty, GST, and various other operating charges.
For most investors, this single percentage was shorthand for what the fund costs. And while it was a reasonable simplification, it was also somewhat opaque because very different kinds of costs were being lumped together.
From April 2026, SEBI requires AMCs to separate these components clearly. At the centre of the new framework is the Base Expense Ratio, or BER. The BER represents only the fee that the AMC charges for managing your money, which is the fund management fee in its truest sense.
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Brokerage costs, STT, stamp duty, GST, and exchange fees are now required to be disclosed separately and will be charged at actual rates. The Total Expense Ratio continues to exist, but it is now the sum of BER plus these separately disclosed items, rather than a single opaque figure.
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 charge. For cash market transactions, the cap has been reduced from 12 basis points to 6 basis points. For derivative transactions, it has come down from 5 basis points to just 2 basis points.
Additionally, the earlier allowance of an extra 5 basis points for schemes with exit loads has been removed entirely. While these might sound like small numbers, the compounding effect over a long investment horizon of fifteen to twenty years can be quite material.
Performance-linked fees: An optional new model
One of the more interesting structural innovations in the new regulations is the introduction of optional performance-linked fees. Under the 2026 framework, mutual fund schemes are now permitted to charge a Base Expense Ratio that varies with the performance of the scheme, subject to conditions that SEBI will specify in detail. This is not a mandatory feature. Fund houses can choose whether to adopt it or stick with the traditional fixed-fee model.
The idea behind performance-linked fees is to better align the interests of the AMC with those of the investor. If the fund performs well, the AMC earns a higher fee. If it underperforms, the fee comes down. However, SEBI has been careful to ensure that this model cannot be misused.
Key safeguards include the requirement that the performance formula be disclosed clearly in the Scheme Information Document and marketing materials, that benchmarks and look-back periods must be objective and consistently applied, and that investors must be given exit options if performance-linked fees are introduced into an existing scheme mid-way without their consent.
High water mark protections are also expected to be incorporated, so investors do not end up paying performance fees for returns that simply recover previous 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 on the categorisation and rationalisation of mutual fund schemes. This circular replaces the earlier classification framework and introduces several meaningful changes to how equity funds are defined and managed.
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The most consequential change for investors is the increase in mandatory minimum equity allocation for several popular fund categories. Previously, many equity fund categories required a minimum of 65% investment in equity instruments.
Under the new rules, this floor has been raised to 80% for categories including Focused Funds, Contra Funds, Value Funds, and Dividend Yield Funds. This change ensures that funds in these categories are more genuinely equity-oriented and reduces the scope for fund managers to hold excessive cash or debt without it being visible in the category label.
For the remaining 20% of the portfolio in these categories, SEBI has also broadened what is permissible. Equity funds can now allocate their non-core portion to gold ETFs, silver ETFs, Infrastructure Investment Trusts (InvITs), Real Estate Investment Trusts (REITs), and debt instruments.
Previously, the non-equity allocation was largely confined to debt and money market instruments. This change gives fund managers somewhat more flexibility in managing risk and diversification, which could benefit investors in volatile market conditions.
Stricter rules on portfolio overlap
If you have ever wondered whether two different mutual funds from the same fund house actually hold the same stocks, the new SEBI rules address this directly. Under the earlier framework, there were limited restrictions on how similar two schemes from the same AMC could be in terms of their holdings.
This sometimes led to a practice informally called closet indexing, where funds that claimed to be actively managed were effectively holding portfolios very similar to each other or to a benchmark index.
From 2026, SEBI has introduced a strict 50% portfolio overlap cap for sectoral and thematic funds within the same fund house. This means that no more than half of the stocks held by one sectoral or thematic scheme can also appear in another scheme from the same AMC.
This calculation will be done on a quarterly basis using daily portfolio data, which is a considerably more rigorous methodology than what was previously required. Existing schemes that do not comply have a three-year window to come into alignment, after which non-compliant funds will be mandatorily merged with other schemes.
The same fund house is also now allowed to offer both a Value Fund and a Contra Fund simultaneously, which was not permitted earlier. The condition is that the portfolio overlap between the two must not exceed 50%. This gives AMCs more product flexibility while preventing the two schemes from becoming mirror images of each other.
Life cycle funds replace solution-oriented schemes
One of the more quietly significant changes in the new classification framework is the elimination of the Solution-Oriented category, which previously included Retirement Funds and Children's Funds. In their place, SEBI has introduced Life Cycle Funds, a more structured and transparent approach to goal-based investing.
Life Cycle Funds follow a glide path strategy, which means the asset allocation automatically shifts over time as you approach a target year or life stage. In the early years, when the investment horizon is long, the portfolio carries higher equity exposure. As the target date approaches, the equity allocation gradually decreases and the debt allocation increases, reducing risk automatically. These funds can invest across equities, debt, gold ETFs, silver ETFs, InvITs, and Exchange Traded Commodity Derivatives, making them genuinely multi-asset in nature.
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For investors who are saving for retirement or a specific long-term goal like a child's education, Life Cycle Funds offer a structured, hands-off approach that removes the need to manually rebalance as you age. The automatic risk reduction feature is particularly valuable for investors who tend to stay in high-equity funds well past the point when it is appropriate for their risk profile.
What has changed for equity savings funds
Equity Savings Funds have also seen an important structural change under the new rules. Previously, these funds had no mandatory minimum net (unhedged) equity exposure. This allowed fund managers to lean heavily on arbitrage strategies, which are lower risk but also carry equity taxation while not providing true equity returns.
Under the 2026 framework, SEBI has introduced a requirement that at least 15% of the portfolio be in unhedged equity, meaning genuine directional equity positions rather than hedged arbitrage trades.
The total equity exposure, including arbitrage, continues to be capped in the range of 65% to 90% to retain the tax treatment as an equity-oriented fund. This change makes Equity Savings Funds more genuinely equity-oriented than they were before, while still maintaining the hybrid character that makes them suitable for conservative equity investors.
Sectoral debt funds: A new category
Among the genuinely new product categories introduced under the 2026 framework is the Sectoral Debt Fund. This is a scheme that invests at least 80% of its assets in high-quality debt instruments, specifically those rated AA+ and above, from a single sector. The eligible sectors include financial services, energy, infrastructure, housing, and real estate.
Sectoral Debt Funds give investors who want debt exposure with a sectoral tilt a more defined vehicle for doing so. However, because these funds concentrate credit risk within a single sector, they carry more idiosyncratic risk than a diversified debt fund. Investors considering this category should be comfortable with sector-level credit concentration and should assess the underlying sector's credit environment carefully before committing capital.
Governance and trustee responsibilities get stricter
The new regulations also significantly strengthen governance requirements for AMCs, their boards, trustees, and key managerial personnel. The roles and responsibilities of various stakeholders have been reorganised and restated with greater clarity. Trustees now carry more explicit accountability for oversight, and the expectations on AMC boards in terms of compliance monitoring have been raised.
For investors, this is a positive development. Stronger governance at the AMC level means greater accountability for how your money is managed, and a reduced risk of the kinds of lapses in oversight that have occasionally caused problems in the industry in the past. While governance changes do not directly translate into returns, they do reduce the tail risk of funds being managed in ways that are not in investors' best interests.
How existing AMCs and fund houses are responding
The transition to the new framework has already begun. Several leading fund houses, including ICICI Prudential, Aditya Birla Sun Life, Quant Mutual Fund, JM Financial, PGIM India, Invesco, Edelweiss, and Baroda BNP Paribas, have issued notice-cum-addendums revising the expense structures in their Scheme Information Documents (SIDs) and Key Information Memorandums (KIMs) to align with the new regulations. These updates primarily affect the Annual Scheme Recurring Expenses (ASRE) and Total Expense Ratio sections of the documents, while other scheme features remain unchanged.
Investors in schemes managed by these fund houses should look out for these addenda and read them carefully. The changes will affect what you see disclosed in your statements and on fund information pages, and it is worth understanding the new terminology so you are not comparing the new BER-based figures with the old all-in TER figures incorrectly.
What should you do as an investor?
The honest answer is that for most investors, no immediate action is required. The new regulations are largely structural and operate at the fund house and scheme level. You do not need to switch funds, alter your SIP, or panic about your portfolio. However, there are a few things worth doing thoughtfully over the coming weeks.
First, take note of any communication your AMC sends regarding changes to your scheme's expense structure. Read the addendum carefully and understand how the BER compares to the earlier TER. In many cases, the BER will be lower than the old TER, but you will now see statutory levies disclosed separately on top of the BER. Second, if you are considering new fund investments, pay attention to whether the scheme uses a fixed BER or a performance-linked BER.
The performance-linked model is more complex, and it is worth understanding how fees will be calculated before you invest. Third, for investors in sectoral or thematic funds, review your portfolio to understand whether any of your schemes might be affected by the new overlap rules over the coming three years.
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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