India revamps mutual fund rule book, opens room for higher gold and silver exposure

India’s markets regulator on Thursday overhauled rules for mutual funds, introducing newer categories of schemes, curbing portfolio overlaps and allowing more exposure to gold and silver.

The move is part of the regulator’s efforts to tighten mutual fund rules through clearer classifications and standardized disclosures, strengthening investor protection in India’s rapidly growing $900 billion industry.

Equity mutual funds have drawn inflows of 12.02 trillion rupees ($132.24 billion) in the last five years, cushioning volatile foreign flows and supporting the domestic markets.

The Securities and Exchange Board of India introduced newer fund categories, including life-cycle funds - meant for long-term investing - and sectoral debt funds, expanding the total number of mutual fund groups to 40 from 36.

For existing categories, SEBI is enforcing stricter rules to ensure schemes remain “true-to-label” so that portfolios align with their defined asset class and stay within risk parameters.

The regulator will also limit overlaps in the portfolios of sectoral, value and contra investment funds.

Asset managers may continue to offer both value and contra schemes, but the overlap between portfolios cannot exceed 50%. For thematic equity schemes, no more than 50% of a portfolio can overlap with other thematic or equity categories, except large-cap schemes.

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Thematic funds have three years to comply with the new rules, while other schemes have six months.

“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,” said Aishvarya Dadheech, founder and chief investment officer at Fident Asset Management.

Asset managers must also publish monthly category-wise overlap disclosures on their websites.

SEBI discontinued solution-oriented schemes with immediate effect, instructing existing schemes to stop subscriptions and merge into similar schemes with comparable asset allocation and risk profiles, subject to regulatory approval.

The framework also continued a minimum 80% equity allocation for dividend yield, value and contra funds.

Increased exposure to gold, silver

The new rules permit mutual funds to allocate a “residual portion” of equity schemes to gold and silver instruments and allow hybrid schemes to invest in gold and silver exchange traded funds (ETF).

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The residual portion refers to the share of a scheme’s corpus that remains after it has met its core asset allocation needs.

While some multi-asset funds could already invest in gold ETFs, the new rules standardise investment in precious metals across equity and hybrid schemes, specifically within the “residual portion”.

Under the newly introduced life-cycle funds, schemes can invest up to 10% in gold and silver ETFs, exchange traded commodity derivatives (ETCD) and infrastructure investment trusts (InvIT).

The changes formalise the inclusion of gold and silver in mutual fund portfolios, giving investors a regulated way to use these metals mainly as diversification tools, while preserving each scheme’s core identity, Fident Asset’s Dadheech said.