SEBI scheme rationalisation circular of 2017
The SEBI scheme rationalisation circular of 2017, formally SEBI Circular SEBI/HO/IMD/DF3/CIR/P/2017/114 dated 6 October 2017, is the most consequential structural intervention in the history of the Indian mutual fund industry . It introduced a standardised categorisation framework for open-ended mutual fund schemes, defining 36 categories (subsequently extended to 37 with the November 2020 introduction of the Flexi Cap category) with precise investment mandates anchored to verifiable financial parameters. Each AMC was permitted to operate only one scheme per category, with limited exceptions for sectoral, thematic, index, and fund-of-funds categories.
The circular was issued under Section 11 of the SEBI Act, 1992 read with Chapter IV of the SEBI (Mutual Funds) Regulations, 1996 , and was operationalised by the SEBI Investment Management Department . The implementation deadline of 28 February 2018 for AMC rationalisation proposals, with most mergers and conversions completed by May 2018, reduced the open-ended scheme count from approximately 2,000 to approximately 550 across 44 AMCs. The framework provides the canonical taxonomy through which all current Indian mutual fund schemes are classified, marketed, benchmarked, and compared.
The circular’s commercial impact has been pervasive. Within each category, schemes from different AMCs are now genuinely comparable on a like-for-like basis, with portfolio constraints, benchmark obligations, and disclosure norms aligned to the category definition. The framework has materially raised the cost of style drift and benchmark gaming, has accelerated AUM concentration in flagship schemes within each category, and has standardised the language of mutual fund product marketing. The post-2017 framework has been amended in 2020 (multi-cap reclassification and Flexi Cap introduction), in 2021 (mandatory ESG category for ESG-labelled schemes), and in 2024 (Specialised Investment Fund framework, alongside but outside the conventional category framework).
Background
Pre-2017 industry condition
Prior to October 2017, the Indian mutual fund industry operated with approximately 2,000 open-ended schemes across 44 AMCs. The proliferation reflected an absence of category-level definitions, which permitted each AMC to launch multiple schemes nominally addressing the same investment objective. A single large AMC could carry 8 to 10 “diversified equity” schemes that were operationally similar but marketed as distinct products. The aggregate scheme count was widely viewed as larger than the volume of distinct underlying portfolios warranted.
Five structural problems were repeatedly identified by SEBI, AMFI, the trustees of multiple AMCs, and external commentators:
- Definitional inconsistency: Multiple AMCs operated schemes labelled “large-cap” whose actual exposure to large-cap stocks varied from 60 per cent to over 90 per cent, making peer comparison meaningless. Two schemes with the same label could have materially different return-risk profiles.
- Style drift: Schemes frequently shifted their effective investment mandate over time without corresponding name changes, with mid-cap drift in nominally large-cap funds being the most commonly cited example. The drift was driven by the fund manager’s pursuit of alpha and the absence of a hard regulatory constraint.
- Excessive proliferation: A single AMC commonly operated 8 to 10 schemes within the broad “diversified equity” bucket that were essentially identical in mandate, adding no meaningful choice while increasing investor decision burden.
- Benchmark gaming: Schemes selected benchmarks that they were structurally likely to outperform rather than benchmarks representative of their actual investment universe. The use of customised or composite benchmarks was widespread.
- Disclosure opacity: The Scheme Information Document (SID) permitted wide minimum-maximum asset allocation bands, giving fund managers latitude to range well outside the scheme’s implied mandate without any disclosure trigger.
Regulatory rationale
SEBI’s Board considered the categorisation problem during 2016 and 2017 and concluded that investor confidence and market development required standardised, enforceable category definitions. The eventual circular emerged from an extensive consultation process with the industry, AMFI, trustees, distributors, and academic commentators. The principal stated objective of the circular, repeated in its preamble, is “to bring uniformity in the characteristics of similar type of schemes launched by different mutual funds” and “to assist investors in making informed decision”.
The 36-category framework
The circular defines 36 categories (37 with the post-2020 Flexi Cap addition) across five broad buckets: equity, debt, hybrid, solution-oriented, and other.
Equity schemes (11 categories)
| Category | Definition |
|---|---|
| Multi Cap Fund | Minimum 65 per cent in equity; minimum 25 per cent each in large-, mid-, and small-cap (post 2020 amendment) |
| Large Cap Fund | Minimum 80 per cent in large-cap stocks (top 100 by market cap on the AMFI list) |
| Large and Mid Cap Fund | Minimum 35 per cent each in large-cap and mid-cap |
| Mid Cap Fund | Minimum 65 per cent in mid-cap stocks (101st to 250th by market cap) |
| Small Cap Fund | Minimum 65 per cent in small-cap stocks (251st rank and beyond) |
| Dividend Yield Fund | Minimum 65 per cent in equity; predominantly high-dividend-yield stocks |
| Value Fund or Contra Fund | An AMC may offer either Value or Contra, not both; minimum 65 per cent in equity |
| Focused Fund | Maximum 30 stocks; minimum 65 per cent in equity |
| Sectoral or Thematic Fund | Minimum 80 per cent in the specified sector or theme; multiple sectoral or thematic funds permitted per AMC |
| ELSS | Minimum 80 per cent in equity with 3-year lock-in; tax benefit under Section 80C |
| Flexi Cap Fund | Added November 2020; minimum 65 per cent in equity, no sub-asset-class constraints |
Within the equity bucket, the Flexi Cap category was added in November 2020 in response to industry feedback after the multi-cap reclassification (described below). The Sectoral and Thematic category is the only equity category in which a single AMC may operate multiple schemes; this asymmetry has produced a sustained NFO pipeline in this category that is discussed in the criticism section.
Debt schemes (16 categories)
| Category | Macaulay duration or definition |
|---|---|
| Overnight Fund | Investments in overnight securities only |
| Liquid Fund | Up to 91-day residual maturity; no structured obligations |
| Ultra Short Duration Fund | Macaulay duration of 3 to 6 months |
| Low Duration Fund | Macaulay duration of 6 to 12 months |
| Money Market Fund | Money market instruments; up to 1-year residual maturity |
| Short Duration Fund | Macaulay duration of 1 to 3 years |
| Medium Duration Fund | Macaulay duration of 3 to 4 years |
| Medium to Long Duration Fund | Macaulay duration of 4 to 7 years |
| Long Duration Fund | Macaulay duration greater than 7 years |
| Dynamic Bond Fund | Across durations; no specific Macaulay duration |
| Corporate Bond Fund | Minimum 80 per cent in highest-rated (AA+ and above) corporate bonds |
| Credit Risk Fund | Minimum 65 per cent in AA and below rated corporate bonds |
| Banking and PSU Fund | Minimum 80 per cent in banking and PSU bonds |
| Gilt Fund | Minimum 80 per cent in government securities |
| Gilt Fund with 10-year constant duration | Minimum 80 per cent G-Secs; Macaulay duration of 10 years or more |
| Floater Fund | Minimum 65 per cent in floating-rate instruments |
The debt-category definitions tie scheme construction to the Macaulay duration of the portfolio (the weighted-average term to receipt of all cash flows, weighted by their present values). Macaulay duration is a stricter and more interpretable constraint than the prior “average maturity” formulation, and was a deliberate choice in the circular drafting.
Hybrid schemes (7 categories)
| Category | Definition |
|---|---|
| Conservative Hybrid Fund | 75 to 90 per cent in debt; 10 to 25 per cent in equity |
| Balanced Hybrid Fund | An AMC may offer Balanced Hybrid or Aggressive Hybrid , not both; balanced is 40 to 60 per cent each in equity and debt |
| Aggressive Hybrid Fund | 65 to 80 per cent in equity; 20 to 35 per cent in debt |
| Dynamic Asset Allocation or Balanced Advantage Fund | Asset allocation managed dynamically; no fixed bands |
| Multi Asset Allocation Fund | Minimum 10 per cent each in at least 3 asset classes |
| Arbitrage Fund | Minimum 65 per cent in arbitrage strategies |
| Equity Savings Fund | Minimum 65 per cent in equity; minimum 10 per cent in debt; uses hedging |
The Aggressive Hybrid / Balanced Hybrid mutual-exclusion provision was a deliberate response to pre-2017 practice, in which AMCs operated multiple “balanced” schemes with overlapping but distinct equity allocations. The post-2017 framework permits only one of the two within an AMC.
Solution-oriented schemes (2 categories)
| Category | Definition |
|---|---|
| Retirement Fund | Minimum 5-year lock-in or until retirement, whichever is earlier |
| Children’s Fund | Lock-in until child attains age 18 or 5 years, whichever is earlier |
Solution-oriented schemes are positioned for life-stage outcomes (retirement, child’s education or marriage) and are characterised by mandatory lock-ins that distinguish them from other open-ended schemes.
Other schemes (4 effective categories)
| Category | Definition |
|---|---|
| Index Funds | Multiple permitted per AMC, one per index |
| Exchange Traded Funds (ETFs) | Multiple permitted per AMC |
| Fund of Funds (Domestic) | Multiple permitted per AMC |
| Fund of Funds (Overseas) | Multiple permitted per AMC, subject to overseas-investment cap |
Index Funds and ETFs are the principal vehicles of the passive shift documented at the passive investing wave in India reference. Multiple permitted per AMC is consistent with the underlying logic that each tracks a distinct index.
The one-scheme-per-category rule
The most commercially impactful provision of the circular is the rule that each AMC may operate only one scheme per category, with the named exceptions for Sectoral or Thematic, Index, ETF, and FoF. The rule required AMCs with multiple schemes in any single category to:
- Identify the surviving scheme.
- Submit a rationalisation proposal to SEBI with proposed mergers or conversions.
- Obtain SEBI’s no-objection and trustee approval for each merger.
- Provide a 30-day exit window to unit-holders of the merging schemes during which redemptions could be made without exit load.
- Complete the merger or conversion through a record-date allotment of units of the surviving scheme to the merging scheme’s unit-holders.
The mechanics of the consolidation are described in detail at the SEBI scheme merger and conversion rules reference. The provision drove the reduction of approximately 1,500 schemes from the industry’s product shelf between November 2017 and May 2018.
AMFI large-mid-small-cap list
A critical enabling element of the categorisation framework is the AMFI list of stocks by market capitalisation. AMFI publishes a list of all BSE- and NSE-listed stocks ranked by average full market capitalisation over a six-month look-back period, updated every six months (January and July). The ranking determines the classification:
- Large-cap: 1st to 100th in ranking.
- Mid-cap: 101st to 250th in ranking.
- Small-cap: 251st rank and beyond.
Fund managers must align their scheme portfolios to the AMFI classifications. If a stock previously classified as large-cap drops below the 100th rank in the next AMFI update, a large-cap fund holding that stock must, within a grace period (typically 30 days from the AMFI publication date), reduce its exposure or accept that the stock is no longer counted toward the 80 per cent large-cap floor. The grace-period mechanism is intended to prevent fire-sale pressure on the affected stocks when the AMFI list changes.
The AMFI classification is mandatory and authoritative for SEBI-regulated mutual fund schemes. Independent index providers and third-party research houses may use different classifications, but those have no regulatory standing for scheme compliance purposes.
Implementation timeline
| Date | Event |
|---|---|
| 6 October 2017 | SEBI Circular SEBI/HO/IMD/DF3/CIR/P/2017/114 issued |
| 31 January 2018 | AMC rationalisation proposals due (initial deadline) |
| 28 February 2018 | Extended deadline for proposal submissions |
| March to May 2018 | SEBI reviewed each AMC’s proposal; trustees approved each merger |
| April to May 2018 | Most mergers and conversions completed with 30-day exit windows |
| September 2018 | First post-rationalisation AMFI factsheet template published |
| October 2018 | Industry composition stabilised with approximately 550 schemes |
The fastest-moving AMCs completed their rationalisation by March 2018; the slowest, where multiple legacy schemes had to be merged, completed by mid-2018. By the time of the first post-rationalisation AMFI monthly disclosure in October 2018, the industry’s product shelf was substantially aligned to the categorisation framework.
Post-2017 amendments
Multi-cap reclassification (November 2020)
SEBI Circular SEBI/HO/IMD/DF3/CIR/P/2020/236 dated 6 November 2020 amended the multi-cap fund definition to mandate minimum 25 per cent each in large-cap, mid-cap, and small-cap. The amendment removed the latitude fund managers had previously had to hold predominantly large-cap stocks in a “multi-cap” fund, requiring meaningful exposure to the smaller market-cap segments. The change is treated in detail at the SEBI multi-cap reclassification 2020 reference; in summary, the amendment forced approximately Rs 30,000 crore of large-cap-tilted “multi-cap” AUM to be re-deployed into mid- and small-cap stocks over a six-month transition period.
Flexi Cap fund introduction (November 2020)
To address the loss of investment-management flexibility in the redefined multi-cap category, SEBI introduced the Flexi Cap fund category in November 2020, requiring only minimum 65 per cent in equity with no sub-asset-class constraints. The category became the principal landing pad for AMCs that did not wish to commit to the multi-cap 25-25-25 allocation; approximately 25 multi-cap funds were converted to Flexi Cap funds by early 2021.
ESG framework (2021)
SEBI added an ESG (Environmental, Social, Governance) Thematic scheme sub-category in 2021, subsequently upgraded to a full ESG disclosure framework with sub-categories. The framework requires standardised ESG scoring and engagement disclosure for all schemes carrying the ESG label.
Specialised Investment Funds (November 2024)
The Specialised Investment Funds (SIF) framework, notified in November 2024, sits alongside the conventional category framework rather than within it. SIFs are restricted to a Rs 10 lakh minimum investment threshold and have access to long-short equity, sectoral concentration, and other strategies inaccessible to conventional mutual funds. The SIF framework is, in effect, a separate regulatory regime layered on top of the 2017 categorisation rather than an amendment to it.
Other minor amendments
The SEBI Master Circular reissue of May 2024 consolidated all categorisation-related provisions into a single operating document. Smaller amendments through 2022 to 2024 addressed the operational details of category compliance, including stricter conditions on the Sectoral and Thematic category, mandatory benchmark consistency rules, and tighter conditions on the Focused Fund’s 30-stock limit.
Market impact
The 2017 rationalisation produced several measurable market-level effects:
Scheme comparability
Within each category, schemes from different AMCs are now genuinely comparable. Performance comparison is precise: a large-cap fund cannot obscure underperformance by holding a different mix of stocks labelled “large-cap”. The post-2017 era has seen significant compression in inter-AMC performance dispersion within categories, consistent with the comparability hypothesis.
Scheme count reduction
From approximately 2,000 open-ended schemes pre-2017, the number fell to approximately 550 by end-2018. As of April 2026, the total is approximately 1,500 schemes, with the increase driven principally by sectoral and thematic launches (which are permitted as multiples per AMC) and by passive funds (Index, ETF, FoF).
AUM concentration
The merger window produced some temporary redemption pressure (investors in merging schemes exited without exit load), but the long-term effect has been increased AUM concentration in the surviving schemes. The top scheme within each category typically commands 30 to 50 per cent of category AUM, with the second and third schemes accounting for a further 20 to 30 per cent.
Benchmark governance
AMCs are required to select benchmarks consistent with the category definition. Custom or exotic benchmarks are disallowed. The result is a higher correlation between scheme and benchmark within each category, consistent with the original objective of the circular.
Style-box discipline
Ongoing AMFI market-cap list updates impose continuous discipline on fund managers to stay within their mandated style box. The semi-annual list update produces predictable rebalancing pressure in certain stocks crossing the 100-or 250-rank thresholds, which is a small but measurable factor in market microstructure.
Sectoral and thematic proliferation
The exception in the one-scheme-per-category rule for Sectoral and Thematic funds has been the principal source of post-2017 scheme proliferation. From approximately 100 sectoral and thematic schemes in 2018, the count crossed 250 by 2026, driven by NFOs in narrowly defined themes (electric vehicles, manufacturing, defence, banking, technology, infrastructure). This is treated in the criticism section below.
Enforcement
SEBI has issued show-cause notices and required explanations from AMCs in several documented instances:
- A large-cap fund’s exposure to mid-cap stocks exceeded the permissible limit between AMFI list updates.
- A credit risk fund’s investment in AA+ and above-rated bonds exceeded the 35 per cent non-AA-and-below limit.
- An AMC was found to have re-launched a category with a new label after merging the original scheme, effectively circumventing the one-scheme-per-category rule.
- A Multi Cap Fund failed to achieve the post-2020 25-25-25 allocation within the prescribed transition window.
Enforcement has been generally calibrated, with most cases resolved through corrective action and limited monetary penalty. The SEBI Investment Management Department maintains an ongoing programme of category-compliance review using AMC monthly portfolio disclosures.
International comparison
The Indian categorisation framework is unusually prescriptive in the global context. The European Union’s UCITS Directive provides for fund-type classifications but leaves category definitions to fund managers and national regulators, with disclosure rather than hard constraints as the principal control. The United States Investment Company Act, 1940, regulates registration but does not prescribe categories; the Securities and Exchange Commission’s Form N-1A disclosure regime relies on the fund’s stated investment objective rather than a regulator-defined category. The Indian framework is closer in form to certain Asian regulators (notably Hong Kong’s SFC type classifications) but more prescriptive in the specific quantitative constraints applied to each category.
Criticism and debates
Sectoral and thematic NFO proliferation
The exception for Sectoral and Thematic funds has produced a sustained NFO pipeline marketing narrowly defined themes. Investor advocates have argued that such launches arrive at the late stage of an industry cycle and are positioned for distributor commission rather than investor outcome. SEBI has, on more than one occasion, indicated that it monitors NFO concentration but has not introduced an aggregate cap or one-scheme-per-AMC rule for the Sectoral and Thematic category.
Multi-cap rigidity
The November 2020 reclassification of multi-cap funds to mandate 25-25-25 allocation has been criticised as overly rigid, on the basis that it forces meaningful small-cap exposure regardless of valuation conditions. The introduction of Flexi Cap was a partial response, but the underlying tension between regulatory mandate and discretionary asset allocation remains.
Focused fund limit
The 30-stock limit on Focused Funds has been argued by some fund managers to be too tight to permit meaningful diversification while preserving the concentrated-portfolio thesis. SEBI has consistently declined to revise the limit, citing the importance of a clear category definition.
Sub-category absence in debt
The 16 debt sub-categories are sometimes criticised for being too narrowly defined, with fund managers having little room to express duration views across the cycle within a single scheme. Industry submissions have periodically proposed widening certain duration bands, with limited regulatory traction.
Recent developments
SIF framework alignment
The Specialised Investment Fund framework of November 2024 has been treated as outside the conventional mutual fund category framework. The interaction between SIFs and the 2017 categories is administered through separate offer-document and disclosure rules.
Real-time disclosure proposals
SEBI’s October 2024 consultation paper proposed real-time intra-day disclosure of category compliance metrics (large-cap percentage for large-cap funds, Macaulay duration for debt schemes). The proposal, if adopted, would represent the first material amendment to the disclosure regime accompanying the 2017 categorisation.
Sectoral and thematic policy review
SEBI’s 2025 to 2026 consultation on Sectoral and Thematic NFO criteria, including a possible cooling-off period between launches in the same theme, was under industry deliberation at the time of writing. No firm proposal had been notified.
See also
- Mutual fund industry in India
- SEBI (Mutual Funds) Regulations, 1996
- SEBI Investment Management Department
- SEBI multi-cap reclassification 2020
- SEBI scheme merger and conversion rules
- Flexi Cap mutual fund in India
- Multi-cap versus Flexi-cap
- Large Cap mutual fund in India
- Mid Cap mutual fund in India
- Focused Equity mutual fund
- Sectoral or Thematic mutual fund
- ELSS mutual fund in India
- Aggressive Hybrid mutual fund
- Multi Asset mutual fund in India
- Arbitrage mutual fund in India
- Equity Savings mutual fund
- Overnight mutual fund
- Liquid mutual fund in India
- Corporate Bond mutual fund
- Credit Risk mutual fund
- Gilt mutual fund
- Scheme Information Document (SID)
- Total Expense Ratio
- Mutual fund riskometer (India)
- Passive investing wave in India
- SEBI Act, 1992
References
- SEBI Circular SEBI/HO/IMD/DF3/CIR/P/2017/114, 6 October 2017, Categorisation and Rationalisation of Mutual Fund Schemes.
- SEBI Circular SEBI/HO/IMD/DF3/CIR/P/2020/236, 6 November 2020, Review of Categorisation of Mutual Fund Schemes (multi-cap reclassification and Flexi Cap introduction).
- SEBI (Mutual Funds) Regulations, 1996, Chapter IV, as amended.
- SEBI Master Circular on Mutual Funds, SEBI/HO/IMD/IMD-PoD-1/P/CIR/2024/137, 27 May 2024.
- AMFI Categorisation of Stocks: Large, Mid, and Small Cap List, amfiindia.com (semi-annual publication, January and July).
- SEBI Circular on Specialised Investment Funds Framework, Securities and Exchange Board of India, November 2024.
- SEBI Annual Report 2017 to 18 and 2024 to 25, Securities and Exchange Board of India, Mumbai.
- AMFI Industry Composition Snapshot, Association of Mutual Funds in India, April 2026.