Important Regulatory Changes & SEBI MF Regulation 2026

 

The Securities and Exchange Board of India (SEBI) notified the SEBI (Mutual Funds) Regulations, 2026 on January 10, 2026, and they came into force on April 1, 2026, replacing the older 1996 framework

The 2026 recast gathers three earlier decisions into one place. SEBI approved the MF Lite regime and the SIF asset class in its 30 September 2024 board meeting. The MF Lite circular followed on 31 December 2024 and took effect on 16 March 2025. The SIF framework was circularised on 27 February 2025 and became effective on 1 April 2025, with a July 2025 follow-up circular on minimum-investment threshold monitoring. The 2026 regulations fold both frameworks into the main body of the law rather than leaving them as standalone circulars, giving them stronger enforcement weight. The important regulatory changes so far is reviewed in the following, in the light of the SEBI MF Regulation 2026

Mutual Fund Definition:

“mutual fund” means a fund established in the form of a trust granted registration under regulation 3 and which raises monies through the sale of units to the public under one or more schemes for investing in securities, money market instruments, gold or gold related instruments, silver or silver related instruments and such other assets and instruments as may be specified by the Board. Mutual fund schemes investing in exchange traded commodity derivatives can hold the underlying goods in case of physical settlement of such contracts;

                                                               Figure: Mutual funds fit in the Capital Market 

As of now, in the regulatory framework the following has taken shape

Feature	Mutual Fund	SIF	PMS	AIF Category III
Minimum investment	Rs 500 (SIP)	Rs 10 lakh (PAN level)	Rs 50 lakh	Rs 1 crore
Short selling	No	Up to 25 per cent unhedged	Yes	Yes
Structure	Pooled (units)	Pooled (units)	Segregated (Demat)	Pooled (units)
Tax treatment	Fund level: nil; investor pays STCG/LTCG	Fund level: nil; investor pays STCG/LTCG	Investor-level on every trade	Fund level at MMR
Daily NAV	Yes	Yes	No	No
Regulator	SEBI (MF Regulations)	SEBI (MF Regulations)	SEBI (PMS Regulations)	SEBI (AIF Regulations)

Core Regulatory Changes in 2026

·         Direct Plans as Default on Platforms: Effective November 1, 2026, SEBI has mandated that digital platforms and Asset Management Company (AMC) websites must set Direct Plans as the default option. Investors choosing Regular Plans must be explicitly informed of higher expense ratios and distribution costs.

·         Unbundled Total Expense Ratio (TER): Mutual fund charges are now split into distinct components: the Base Expense Ratio (BER) (reflecting core fund management), separate brokerage/trading charges, and statutory levies (GST, STT, stamp duty) instead of a single bundled number.

·         Equity Fund Residual Allocation (Gold, Silver & InvITs): Equity mutual funds can now invest up to 35% of their residual portfolio (money not deployed in core equity) into alternative instruments like gold, silver, and Infrastructure Investment Trusts (InvITs), reducing the need to hold idle cash during volatile markets.

·         Introduction of Life Cycle Funds: SEBI introduced a new target-maturity equity category called Life Cycle Funds (5 to 30-year tenures), featuring automated glide paths that shift asset allocation toward debt as the target maturity approaches.

·         Specialised Investment Funds (SIFs): A new hybrid product category bridges mutual funds and Portfolio Management Services (PMS), requiring a minimum investment of ₹10 lakh per PAN and permitting unhedged short positions via derivatives up to 25% of net assets.

·         Portfolio Overlap Caps: Sectoral and thematic equity schemes must restrict portfolio overlap to a maximum of 50% with other schemes within the same AMC (excluding large-cap funds) to ensure true-to-label differentiation.

·         MF Lite Framework: Lighter compliance rules are introduced for passive-only fund houses, with index fund base expense ratios capped at 0.90%.

·         Nomination Norms: Modified nomination rules allow up to 3 nominees for mutual fund folios, with streamlined digital e-Sign or 2FA-based submission

A quick look at the important aspects that has changed in the SEBI MF Regulation 2026 help readers update themselves, fast and move forward

Aspect	1996 Regulations	2026 Regulations
Mutual fund types	Single traditional mutual fund	Regular MF, MF Lite, Specialised Investment Fund
Sponsor routes	One route: 5-year track record + profitability mandatory	Two routes: Route 2 allows capital-heavy entrants without profitability history
Control definition	No formal definition; market practice often uses a 50 per cent threshold	Formally defined at 10 per cent voting rights
Expense structure	Single bundled TER	Unbundled: BER + brokerage + statutory levies
Performance fees	Not permitted	Optional, subject to SEBI conditions
Trustee structure	Trustee company only	Trustee company (regular) + debenture trustee (MF Lite)
Market abuse prevention	Ad hoc circulars	Mandatory institutional mechanism + whistleblower policy
Sponsor exit	No formal mechanism	Formal SEBI-approved dissociation pathway

Mutual Funds Lite (MF Lite)

The Securities and Exchange Board of India (SEBI) introduced the Mutual Funds Lite (MF Lite) regulatory framework on December 31, 2024 (effective March 16, 2025) to create a relaxed, "light-touch" compliance regime for passively managed mutual fund schemes

 

Key Features of MF Lite

·         Target Schemes: Covers domestic equity index funds and ETFs, target-duration and G-Sec/T-bill/SDL debt index funds, gold/silver ETFs, single-index fund-of-funds (FoFs), and specific overseas ETFs/FoFs.

·         Lower Entry Barriers: Eases net worth and profit track-record requirements for Asset Management Companies (AMCs) focusing purely on passive products.

·         Compliance Relief: Exempts MF Lite AMCs from standard active-fund requirements like half-yearly portfolio statements, rigid trust deed formats, and complex governance structures.

·         Recent Milestones: In October 2026, 1 Finance received SEBI in-principle approval to potentially become the first dedicated AMC operating under the MF Lite framework.

 

 

India's mutual fund industry managed Rs 82.22 lakh crore in assets as of June 2026, with 27.86 crore investor folios, according to AMFI data. Within this, passive strategies have grown rapidly as investors recognise that cost compression over a 10-to-20-year horizon compounds into meaningful corpus differences. MF Lite is SEBI's attempt to accelerate this trend by making it easier and cheaper to launch passive-only fund houses.

MF Lite is a lighter registration and compliance regime for asset management companies that run only passively managed schemes: index funds, exchange-traded funds and fund-of-funds investing in passive schemes. It does not apply to active funds. The framework offers lower entry capital – an MF Lite AMC must maintain net worth exceeding Rs 50 crore, reducible to Rs 25 crore after five consecutive profitable years – and relaxed ongoing compliance, such as simplified scheme documents updated annually rather than more frequently. In exchange, the schemes must remain genuinely passive.

The critical point for investors: MF Lite does not automatically lower the total expense ratio on a fund you already hold. It makes it easier for new entrants to compete on passive products, which may create cost pressure over time, but there is no guaranteed fee cut on existing schemes.

If you hold an index fund, the smart move is to compare its current expense ratio and tracking error against alternatives before switching, factoring in exit loads and capital gains tax.

MF Lite also permits existing fund houses to transfer eligible passive schemes to a separate MF Lite entity within the same group. Once transferred, the original mutual fund is barred from launching passive schemes eligible for MF Lite, preventing regulatory arbitrage where a full-service house runs a passive shell under lighter rules.

Specialised Investment Funds (SIF):

A Specialised Investment Fund (SIF) is a SEBI-regulated investment product category introduced to bridge the gap between traditional mutual funds and Portfolio Management Services (PMS).

Key Features of SEBI SIFs

·         Regulatory Framework: Governed under SEBI Mutual Fund Regulations. Instead of traditional "schemes," SEBI classifies them as "investment strategies".

·         Minimum Investment: Requires a minimum aggregate investment of ₹10 lakh at the PAN level across SIF strategies of an AMC (accredited investors may have specific exemptions). [1, 2]

·         Investment Strategies: Allows advanced and flexible strategies not typically permitted in standard mutual funds, such as long-short equity, sector rotation, dynamic asset allocation, and limited unhedged (naked) shorting or derivative exposure.

·         Structure: Investors hold units in a pooled investment vehicle (unlike PMS, which provides a custom-managed individual portfolio).

·         Disclosure & Documentation: Asset management companies must publish an Investment Strategy Information Document (ISID) alongside standard mutual fund documents detailing risks, benchmarks, and fee structures.

·         Risk Profile: Generally carries a moderate to high risk profile due to complex trading strategies and derivatives use

As of January 2026, SIF assets stood at Rs 6,564 crore across the industry, with 27 live schemes from 13 asset management companies offering equity long-short, hybrid long-short and multi-asset strategies, according to data tracked by AND Fintech and AMFI monthly disclosures. SEBI's July 2025 circular mandates daily monitoring of the Rs 10 lakh minimum threshold.

A Specialised Investment Fund is a pooled product that sits between a traditional mutual fund and portfolio management services. It operates under the mutual fund trust structure and receives mutual fund tax treatment, but it can deploy strategies that plain mutual funds cannot. The defining feature is the ability to take unhedged short positions via derivatives up to 25 per cent of net assets, allowing the fund manager to profit from falling prices or overvalued sectors in a way that long-only funds cannot.

The minimum investment is Rs 10 lakh per PAN, aggregated across all SIF strategies offered by the same AMC. You cannot split Rs 5 lakh across two SIFs from the same house to get under the floor. SEBI-accredited investors are exempt from this minimum. SIPs, STPs and SWPs are permitted, but the cumulative commitment must satisfy the Rs 10 lakh threshold at all times. If redemptions pull your holding below Rs 10 lakh, the AMC may require you to top up or exit. Liquidity terms vary: open-ended SIFs may offer daily redemption, while interval or close-ended structures can impose notice periods of up to 15 working days.

The tax treatment follows the mutual fund framework, but with a critical nuance: whether a SIF is equity-oriented depends on its actual portfolio allocation, not just its category name. Equity-oriented SIFs attract 20 per cent STCG and 12.5 per cent LTCG after 12 months with the Rs 1.25 lakh annual exemption. Non-equity-oriented SIFs attract slab-rate STCG and 12.5 per cent LTCG without the exemption. Two SIFs in the same AMFI category can sit in different tax brackets depending on their underlying asset mix, so read the Investment Strategy Information Document before investing.

SIF distribution requires NISM Series XIII certification, which fewer than 600 distributors nationwide currently hold, according to AND Fintech. A regular ARN-registered mutual fund distributor cannot sell you a SIF without this additional qualification. If you are considering a SIF, verify your distributor's certification status before proceeding.

Unbundled Fees: How BER Changes

Until March 2026, Indian mutual funds reported a single Total Expense Ratio that bundled management fees, distribution commissions, brokerage, GST, Securities Transaction Tax, stamp duty and exchange charges into one opaque number.

Under the 2026 framework, SEBI has separated the Base Expense Ratio from statutory levies and brokerage for the first time. Index funds and ETFs now face a BER cap of 0.90 per cent, down from 1.00 per cent previously, while cash market brokerage is capped at 6 basis points and derivatives at 2 basis points, according to SEBI's December 2025 board meeting outcome. The additional 5 basis points allowance linked to exit loads has been removed entirely.

The 2026 regulations split this into three distinct components:

1.      Base Expense Ratio (BER): The core fee that covers investment management, administration, registrar costs and distributor payouts in regular plans. SEBI caps this.

2.      Brokerage and transaction costs: Pure brokerage paid to brokers on the fund's trades, now capped separately.

3.      Statutory and regulatory levies: STT, CTT, GST, stamp duty, SEBI fees and exchange charges, charged on actuals and shown distinctly outside the BER cap.

This matters because the old bundled TER made it impossible to separate what you paid for fund management skill from what you paid for the manager's trading activity and government taxes. Two equity funds with identical management costs of 0.95 per cent could report different TERs purely because one churned its portfolio aggressively, triggering higher brokerage and STT. Under the new rules, you can compare the true management cost without worrying that a change in GST or stamp duty rates has inflated the number.

Category	Old Cap (TER)	New Cap (BER)
Index funds / ETFs (open-ended)	1.00 per cent	0.90 per cent
Fund of Funds (equity-oriented)	2.25 per cent	2.10 per cent
Close-ended equity schemes	1.25 per cent	1.00 per cent
Cash market brokerage	12 bps	6 bps
Derivatives brokerage	5 bps	2 bps

The cap reductions look small, but the compounding impact is not. Consider a Rs 10 lakh investment in an index fund over 20 years at a gross return of 12 per cent annually. At the old 1.00 per cent TER, the net return is 11.00 per cent, producing a corpus of roughly Rs 80.6 lakh. At the new 0.90 per cent BER plus approximately 0.05 per cent in brokerage and levies, the net return rises to about 11.05 per cent, producing roughly Rs 82.0 lakh. The differential is approximately Rs 1.4 lakh, based purely on the cap change. In practice, large AMCs already charged well below the old cap, so the real benefit accrues to investors in smaller or newer index funds that previously held the ceiling.

Up to 35% Allocation to Gold, Silver, and InvITs

In a significant move toward multi-asset efficiency, SEBI allows equity mutual funds to allocate up to 35% of their residual portfolio to alternative assets, including gold and silver ETFs, as well as Infrastructure Investment Trusts (InvITs).
Previously, when equity valuations stretched or market volatility surged, fund managers were forced to hold cash or low-yielding debt. This update allows equity funds to hold precious metals as an automatic domestic inflation hedge without losing their core classification.

Strict 50% Portfolio Overlap Cap for Value and Contra Funds

AMCs can continue running both Value Funds and Contra Funds, but with a strict condition: the portfolio overlap between the two schemes cannot exceed 50%.

·         A Value Fund must target fundamentally solid stocks trading below their intrinsic value.

·         A Contra Fund must focus on out-of-favor companies or sectors going against prevailing market sentiment.

If an AMC's Value and Contra funds share more than 50% of the same securities, the fund house must rebalance holdings to maintain genuine strategy uniqueness.

Accordingly, sectoral and thematic funds  are compelled to being “true to their label”

The SEBI's new rules for equity funds ensure that when an investor selects a sectoral or thematic fund, the portfolio truly reflects the chosen sector or theme. Existing sectoral/ thematic funds have been given three years to align their portfolios with this requirement. 

Example

Assume an asset management company runs two schemes:

Diversified Equity Fund

Defence Sector Fund

Calculating the Overlap

Note that the overlap is calculated based on the lower weight of common stocks present in both schemes. Suppose the stocks common to both funds are:

Common stock	Weight in the Diversified Fund	Weight in the Defence Fund	Overlap Contribution
Defence Company A	30%	30%	30%
Defence Company B	20%	25%	20%
IT Company Y	10%	5%	5%

So, the total overlap is 55% (30% + 20% + 5%), which violates the maximum allowed overlap of 50%. To remain compliant, the fund manager must now reduce common holdings. 

Realise that the above overlapping rule also applies to value funds and contra funds issued by the same AMC. 

Introduction of Life Cycle Funds (A New Mutual Fund Category)

 

SEBI introduced Life Cycle Funds in February 2026 as a new goal-based, target-date mutual fund category in India, replacing older Solution-Oriented Schemes (such as retirement and children's funds)

The SEBI has introduced Life Cycle Funds, which come with a “target maturity” and a pre-defined “glide path”. Such schemes would invest in a combination of asset classes, including:

Equity

Debt instruments

Infrastructure Investment Trusts (InvITs)

Exchange Traded Commodity Derivatives (ETCDs), and

Gold or silver ETFs

At the beginning of the investment period, the fund may hold a higher allocation to growth assets such as equities. However, as the maturity date approaches, the portfolio may shift towards relatively stable assets such as debt instruments. Such schemes must follow the benchmark used for Multi-Asset Allocation Funds.

Key Features of SEBI Life Cycle Funds

·         Target-Date & Glide Path: Each fund has a fixed maturity year in its name (e.g., Life Cycle Fund 2050). They automatically lower equity exposure and shift toward safer debt and commodities over time.

·         Tenures: Available in 5-year intervals ranging from 5 to 30 years (5, 10, 15, 20, 25, 30 years).

·         AMC Limits: Each Asset Management Company (AMC) can operate a maximum of 6 Life Cycle Funds at any time.

 

·         Asset Allocation & Quality:

o   Early years lean heavily into equity (up to 95%).

o   Debt investments must be rated AA and above, with maturity not exceeding the fund's target date.

o   Can also allocate to gold, silver ETFs, and commodity derivatives.

·         Exit Loads: Structured to discourage premature withdrawals: 3% in Year 1, 2% in Year 2, and 1% in Year 3, with 0% load after 3 years.

·         Taxation: Designed to maintain equity/equity-arbitrage status (up to 50% arbitrage exposure near maturity), allowing qualifying long-term capital gains (LTCG) treatment rather than standard debt-fund taxation.

·         Post-Maturity Handling: When a fund has less than one year remaining, it can optionally be merged into a nearest active Life Cycle Fund with unitholder consent

The introduction of Life-Cycle Funds allows hands-off investors to automate retirement rebalancing without having to manually switch funds every few years.

Life Stage	Target Horizon	Equity Allocation	Debt / Gold / Silver	Strategic Objective
Early Accumulation	20 to 30 years	80% to 100%	Very Low (0% to 20%)	Maximum capital growth
Mid Accumulation	10 to 20 years	65% to 80%	Moderate (20% to 35%)	Balanced growth with stability
Pre-Retirement	5 to 10 years	40% to 65%	High (35% to 60%)	Capital preservation and de-risking
Preservation Phase	Post-Retirement	0% to 40%	Very High (60% to 100%)	Steady income and capital protection

Discontinuation of Solution-Oriented Schemes

The solution-oriented category, which housed retirement funds and children's gift plans, has been officially discontinued.
While these schemes featured mandatory 5-year lock-ins and emotional branding, their portfolio construction was practically identical to standard aggressive hybrid or flexi-cap funds.

AMCs can no longer market equity-linked schemes using emotional life-stage labels unless they feature an automatic asset-allocation mechanism. Existing solution-oriented schemes will not be shut down abruptly; instead, they will be rationalized and merged into standard categories matching their true underlying asset mix.

Control/Governance Aspects

a)      The 10 per cent Control Rule:

Under the old regime, the regulations did not expressly define control, and market participants often reasoned from higher thresholds drawn from the Takeover Code or company law.

The new 10 per cent line is a bright-line test. Once a shareholder crosses 10 per cent in an AMC or trustee company, they become an associate, and the conflict-of-interest and cross-investment restrictions that apply to insiders now reach them.

The 2026 regulations formally define control as holding shares carrying at least 10 per cent of voting rights, alone or with persons acting in concert, replacing the earlier undefined approach that market practice often interpreted through company law thresholds. This expands the associate perimeter and triggers cross-holding restrictions for institutional shareholders, as noted in SEBI's informal guidance letter of April 2026.

The practical impact is sharpest for fund houses with multiple financial-sector shareholders each holding between 10 and 20 per cent. Under the old approach, several may have sat outside the associate definition. Under the 2026 test, each crosses the line, and every scheme investment or transaction touching those shareholders and their group entities must now be mapped against insider-transaction limits. SEBI's Regulation 6 prohibits any sponsor, associate, group company or 10 per cent shareholder in an AMC from holding 10 per cent or more in any other mutual fund's AMC or trustee company, or from having board representation there.

For investors, this is a governance win. A narrower control definition allowed concentrated shareholdings to operate below the conflict-of-interest radar. The 10 per cent threshold forces greater transparency about who really owns and influences the fund house managing your money. It also changes how future investments into AMCs are structured: strategic investors that want to stay below the insider line must now respect a 10 per cent ceiling.

The 2026 regulations also introduce a formal sponsor dissociation mechanism. A sponsor can now exit through a defined SEBI-approved process, reducing shareholding below the 10 per cent control line, reconstituting the board so that independent directors form at least two-thirds majority, and allowing the AMC itself or another entity to step into the sponsor role. This is not a quiet share sale; it is a supervised exit with governance conditions attached. For investors, this means weaker or conflicted sponsors can be replaced without destabilising the schemes you hold. 

    b). The 20/25 rule in mutual funds

The 20/25 rule is a mandatory SEBI guideline requiring every mutual fund scheme to have at least 20 distinct investors, with no individual investor holding more than 25% of the total assets under management (AUM). This prevents high-net-worth single investors from destabilizing a fund during large redemptions.

A foundational compliance standard that frequently confuses investors is the SEBI 20/25 Rule. Designed to protect retail investors from concentration risk and sudden fund liquidation shocks, this mandate enforces two strict rules:
 

·         Minimum 20 Investors: Every mutual fund scheme and individual plan must maintain at least 20 unique investors at all times.

·         Maximum 25% Holding: No single investor (individual or corporate entity) can hold more than 25% of the scheme's total corpus or AUM.
 

If a corporate investor or Ultra-HNI holds more than 25% of a scheme, a sudden exit could force the fund manager into distress sales, hurting small retail unit-holders. The 20/25 rule ensures that fund houses cannot run personalized portfolios disguised as public mutual funds.

     c) Performance-Linked Fees

The 2026 regulations permit, for the first time, an optional performance-linked BER model. Under this structure, a scheme may charge a base expense ratio that varies with performance relative to a benchmark, subject to conditions that SEBI will specify. The emerging framework suggests four non-negotiables: the performance formula must be disclosed in offer documents; unilateral midway introduction is barred without investor consent or exit options; benchmarks and look-back periods must be objective and not cherry-picked; and symmetry must apply, meaning underperformance should reduce fees, not just outperformance increase them.

In an open-ended fund, expenses are deducted daily from NAV. You cannot wait until year-end, discover that the fund beat its benchmark, and then charge a higher fee retroactively for the previous 12 months. The daily NAV mechanism requires daily fee accuracy, which is workable only if the performance fee is calculated and adjusted in real time – a systems challenge most

   d). Riskometer

The SEBI Riskometer is a visual, speedometer-like tool mandated by the Securities and Exchange Board of India (SEBI) to help mutual fund investors understand the level of risk associated with a specific scheme

The 6 Risk Levels

The Riskometer categorizes mutual funds into six distinct levels of risk:

·         Low (Green): Minimal volatility; ideal for risk-averse investors. Includes overnight, liquid funds, and short-maturity gilt or fixed maturity plans (< 90 days).

·         Low to Moderate (Light Green): Minor risk and short-to-medium duration. Includes ultra-short duration and money market funds.

·         Moderate (Yellow): Balanced or moderate risk for medium- to long-term investing. Includes arbitrage funds, hybrid debt-oriented funds, and medium-term corporate bonds.

·         Moderately High (Caramel / Orange-Yellow): Higher volatility with greater potential for growth. Includes equity savings and credit risk funds.

·         High (Dark Orange): Significant market volatility. Primarily consists of equity-oriented funds, gold, or silver funds.

·         Very High (Red): Maximum volatility and aggressive risk-return potential. Includes sectoral/thematic equity funds, small-cap funds, and international/overseas mutual funds.

Benefits of the Riskometer

1.            Risk Assessment: The Riskometer helps investors gauge the risk level of a mutual fund scheme before investing.

2.            Decision Making: Investors can align their risk appetite with the right fund category.

3.            Transparency: It ensures that mutual funds are transparent about their risk levels, fostering trust.

4.           Simplification: The visual representation is easy to understand, making it accessible to novice investors.

5.            Enhanced Awareness: Investors become more aware of the risk-return trade-off.

6.            Informed Decisions: It helps investors choose funds that match their financial goals and risk tolerance.

7.            Standardized Tool: Being a regulatory mandate, it ensures consistency across all fund houses.

Those who read this, also read:

1. SEBI Mutual Fund Categorisation (Revised) 2026

2. SEBI  Categorisation of MF Products

3. Risk Profiling of Investor Vs. Risk of Mutual Fund Scheme