SEBI Mutual Funds Regulations 2026: New Expense Ratio and Fund Classification Framework

On January 16, 2026, the Securities and Exchange Board of India (SEBI) notified the SEBI (Mutual Funds) Regulations, 2026, replacing the 1996 regulations that had governed India's mutual fund industry for three decades. The new regulations came into effect on April 1, 2026, and introduce significant changes to how mutual fund expenses are disclosed, how fund categories are structured, and how portfolio overlap between schemes is managed. With India's mutual fund industry managing assets worth over Rs 70 lakh crore, these changes affect millions of investors and every asset management company (AMC) operating in the country. This article breaks down the key changes and their practical implications.

The Base Expense Ratio Framework

The most significant change for investors is the introduction of the Base Expense Ratio (BER) concept. Under the old regulations, the total expense ratio (TER) bundled together the AMC's management fee with transaction costs such as brokerage, securities transaction tax (STT), stamp duty, and exchange fees. Investors could not easily determine how much of their expense ratio was going to the fund manager versus being consumed by transaction costs. The 2026 regulations separate these components. The BER reflects only the fee charged by the AMC for managing investors' funds. Transaction costs, including brokerage, STT, stamp duty, and exchange fees, are now disclosed separately. This unbundling allows investors to directly compare fund management fees across AMCs and make more informed investment decisions. AMCs must disclose the BER prominently in scheme documents and on their websites.

Expanded Fund Categories: From 36 to 40

The regulations expand the total number of mutual fund categories from 36 to 40 by introducing new categories. Life-Cycle Funds are a new addition designed for retirement and goal-based investing, automatically adjusting their asset allocation as the investor approaches the target date. Sectoral Debt Funds allow thematic investing in fixed-income instruments of specific sectors, providing investors with targeted debt exposure. The regulations also refine existing categories. For equity schemes, the minimum equity allocation for specific categories has been raised to 80 percent, ensuring that funds remain true to their stated investment objective. The categorisation changes require existing schemes to align their portfolios with the new definitions within specified timelines.

Portfolio Overlap Restrictions

A notable new provision addresses the problem of portfolio overlap between schemes offered by the same AMC. For sectoral and thematic equity categories, no more than 50 percent of the portfolio can overlap with other equity schemes of the same AMC, except Large Cap funds. This restriction is calculated on a quarterly basis using daily portfolio values. Existing schemes have three years to comply with this requirement. The overlap restriction addresses a long-standing investor concern that different funds offered by the same AMC often held substantially similar portfolios, effectively charging separate fees for the same exposure. By limiting overlap, SEBI aims to ensure that each scheme offers genuinely differentiated investment exposure.

Implications for AMCs and Distributors

For AMCs, the new regulations require significant operational changes. Expense disclosure systems must be updated to separate BER from transaction costs. Portfolio management teams must monitor overlap ratios and adjust holdings to comply with the 50 percent cap. Scheme documents, factsheets, and websites must be updated to reflect the new categorisation framework. For mutual fund distributors, the BER transparency means that investors will ask more pointed questions about fund management fees, requiring distributors to be prepared with comparative data. The three-year compliance window for existing schemes provides some breathing room, but AMCs that proactively align their portfolios will have a competitive advantage in demonstrating compliance and investor-friendly practices.

What Investors Should Know

For retail investors, the key takeaway is greater transparency. The BER framework makes it easier to compare the actual cost of fund management across different AMCs and schemes. Investors should review updated scheme documents and factsheets to understand how their fund's expenses break down under the new disclosure regime. The expanded category list may also create new investment options, particularly Life-Cycle Funds for retirement planning. Existing SIP investors need not take any action, as their schemes will align with the new categories within the compliance window. However, investors holding multiple thematic or sectoral funds from the same AMC should watch for portfolio restructuring as the overlap restrictions take effect, which may change the risk and return profile of their holdings.