Scheme Categorisation (SEBI 2017)
SEBI's October 2017 scheme categorisation and rationalisation circular mandated that each AMC may offer only one open-ended scheme per defined investment category across 36 prescribed categories for equity, debt, and hybrid funds, fundamentally restructuring the Indian mutual fund product landscape by eliminating redundant schemes and creating standardised fund types with clear portfolio mandates.
Before the October 2017 circular, the Indian mutual fund industry suffered from a proliferation of loosely defined schemes. An AMC could offer three or four different large-cap equity funds under names such as Growth Fund, Bluechip Fund, Equity Fund, and Top 100 Fund — all with broadly similar mandates but slight portfolio differences that obscured meaningful comparison. Investors and advisors found it difficult to compare performance across AMCs when the underlying mandates varied, and AMCs could cherry-pick whichever fund had the best recent performance for marketing purposes. SEBI's rationalisation directive was a structural correction to these distortions.
The circular defined 36 open-ended scheme categories: 10 for equity, 16 for debt, 6 for hybrid, and 4 solution-oriented and other schemes. For each category, SEBI specified a precise investment mandate including minimum allocation thresholds, universe definitions, and in some cases index-based definitions. For example, a Large Cap Fund was defined as a scheme investing at least 80% of total assets in equity and equity-related instruments of large-cap companies — with large-cap defined as the top 100 companies by full market capitalisation as per AMFI's semi-annual list. Similarly, a Mid Cap Fund required minimum 65% in mid-cap companies (ranked 101-250), and a Small Cap Fund required minimum 65% in small-cap companies (ranked 251 and below).
The rationalisation process required AMCs to map each existing scheme to one of the 36 prescribed categories and either rename, restructure, or merge it accordingly. Since only one scheme per category was permitted, AMCs with multiple overlapping products had to consolidate. This triggered a massive rationalisation exercise in 2018 and early 2019, during which the total number of open-ended schemes in the industry fell from over 2,000 to approximately 1,200. Investors in merged or restructured schemes received load-free exit windows as compensation for the involuntary change in scheme attributes.
For equity schemes, the categorisation introduced important new fund types that previously lacked clear definition. The Flexi Cap Fund category — introduced in November 2020 as an amendment — allowed fund managers to invest across large, mid, and small caps without minimum allocation constraints, providing genuine flexibility. The Multi Cap Fund, by contrast, was defined to require minimum 25% each in large, mid, and small cap — a binding constraint that forced many erstwhile multi-cap funds to either restructure their portfolios or convert to the Flexi Cap category. This distinction had meaningful performance implications given the historically different return profiles of market-cap segments.
For debt schemes, the categorisation introduced maturity-based definitions for categories such as Overnight Fund, Liquid Fund, Ultra Short Duration Fund, Short Duration Fund, Medium Duration Fund, Long Duration Fund, and Gilt Fund. Each category specified a Macaulay duration range that the portfolio must stay within, allowing investors to make duration-based allocation decisions with confidence that the fund manager could not materially alter the duration profile without triggering a change in fundamental attributes.