Since April 2026, SEBI's 'Reset 2.0' has introduced stricter categorization, new expense ratio models, and portfolio overlap limits for mutual funds. Investors now face a changed landscape regarding asset allocation and fund transparency. Understanding these updates is critical to ensuring your current holdings still align with your original financial goals and risk tolerance.
The regulatory environment for equity mutual funds in India has undergone a major shift following the implementation of the Mutual Fund Reset 2.0 framework, which came into effect on April 1, 2026. These updates were designed by the Securities and Exchange Board of India (SEBI) to increase transparency, reduce the duplication of schemes within a single fund house, and ensure that funds remain true to their stated investment labels.
One of the most notable changes is the introduction of portfolio overlap limits. For sectoral and thematic equity funds, SEBI has now capped portfolio overlap at 50 percent. This rule is designed to prevent fund houses from managing multiple schemes that hold essentially the same stocks while charging separate management fees for each. For investors, this provides a cleaner way to diversify, as it reduces the risk of holding multiple funds that are structurally identical.
Another significant update is the expanded flexibility for fund managers regarding asset allocation. Equity and hybrid mutual fund schemes are now permitted to invest up to 35 percent of their corpus in alternative assets, including gold, silver, and Infrastructure Investment Trusts (InvITs). This shift is intended to provide fund managers with tools to hedge against equity market volatility, though it also changes the risk profile of schemes that were historically limited to pure stock and bond exposure.
Investors should also be aware of the transition from the Total Expense Ratio (TER) to the Base Expense Ratio (BER) model. By separating core management fees from statutory charges, this new framework aims to offer greater clarity on the actual costs associated with fund management. While this transparency is a positive, it may cause temporary confusion for investors comparing historical costs with current expense structures, as the calculation method has fundamentally changed.
Furthermore, the industry has discontinued traditional solution-oriented schemes, such as those specifically branded as retirement or children’s funds. These have been replaced by new Life Cycle Funds, which utilize glide-path allocations—automatically adjusting the balance between equity and debt as the investor approaches their financial goal.
For investors, these changes create a need for a portfolio audit. Since the April 2026 implementation, the underlying mandates and cost structures of many funds have evolved. Shareholders should check if their existing funds have undergone reclassification or if their current holdings now overlap with other funds in their portfolio more than they previously did. The key monitorable for the coming months will be how these funds adjust their asset mixes under the new 35 percent alternative investment limit and whether this leads to improved performance during market corrections.