SEBI Lets Retirement, Children's Funds Continue
In a key regulatory move, the Securities and Exchange Board of India (SEBI) has reversed its decision to phase out Retirement and Children's funds. This means these 'solution-oriented' schemes can continue, following industry concerns about potential tax issues and investor disruption. The earlier February directive had signaled the end for these funds.
Roughly ₹57,663 crore in assets managed by these schemes can now maintain their existing structure. However, Asset Management Companies (AMCs) must follow new rules on portfolio overlap when introducing Life Cycle Funds. DP Singh, Deputy Managing Director and Joint CEO of SBI Mutual Fund, stated that SEBI addressed critical industry concerns, allowing these funds to persist by foregoing the launch of some proposed Life Cycle Fund options. This decision balances SEBI's goal of simplifying products with the need for continuity for investors in established, goal-based funds.
Mutual Funds Face Sweeping Changes from April 2026
Starting April 1, 2026, SEBI's updated Mutual Funds Regulations will bring new standards for transparency and operations in the industry. A major change is the new Base Expense Ratio (BER) system, which separates statutory levies like Goods and Services Tax (GST) and Securities Transaction Tax (STT) from fund management fees. These costs will be shown separately, aiming to give investors a clearer view of fund expenses.
Expense ratio caps are also tighter, with index funds and ETFs now capped at 0.90% instead of 1.00%. Brokerage and transaction costs are also lower: 6 basis points (bps) for cash market trades (down from 12 bps) and 2 bps for derivatives (down from 5 bps).
Alongside expense changes, SEBI has introduced strict rules on portfolio overlap. Thematic and sector equity funds must limit overlap with other equity schemes (except large-cap) to 50%. Existing funds have three years to comply or face mandatory mergers. This forces AMCs to focus on unique products, potentially slowing new launches and encouraging consolidation of similar funds.
New categories such as Life Cycle Funds, with built-in glide paths and set tenures, are designed for long-term investing and will replace the phased-out solution-oriented categories. Also, minimum equity for certain funds like Value and Contra Funds is now 80%.
Strong Market Growth Continues for Indian Mutual Funds
India's mutual fund industry has shown strong growth, with Assets Under Management (AUM) expected to exceed ₹81-82 lakh crore by early 2026. Systematic Investment Plan (SIP) inflows are setting records, hitting ₹31,002 crore in January 2026, showing investor confidence and steady investing. Passive funds now make up 19% of total AUM.
Despite regulatory changes, AMCs are expected to adapt rather than face major distress. While lower expense ratios and cost caps could reduce Profit Before Tax (PBT) by 30-33% for top firms like HDFC AMC and Nippon India AMC, excluding GST from the Base Expense Ratio provides some relief, making the net earnings impact less severe for larger companies.
Companies like ICICI Prudential AMC (P/E ~47), HDFC AMC (P/E ~33), and Nippon Life India AMC (P/E ~35.58) have high market capitalizations, suggesting investors expect continued AUM growth and efficiency. The focus is moving from pricing to scale, efficiency, and unique investment strategies. A. Balasubramanian, MD and CEO of Aditya Birla Sun Life AMC, noted that investors prioritize long-term wealth creation, a trend that remains consistent despite market shifts or regulatory tweaks.
AMCs Brace for Complexity and New Challenges
Although SEBI's reversal offers quick relief, AMCs face a long-term challenge adapting to a more complex, compliance-focused regulatory world. The strict 50% portfolio overlap rule and the move away from solution-oriented categories mean AMCs must rethink their product offerings. Smaller firms may face greater pressure to grow and become more efficient, possibly leading to more mergers.
SEBI initially wanted to simplify investment options and cut product duplication, a concern that still lingers despite the reversal. AMCs that don't innovate beyond standard products risk becoming interchangeable. How well Life Cycle Funds attract investors and how AMCs manage the transition for current investors will be key.
Analysts suggest potential profit margin cuts for AMCs are worth watching, though large firms are better equipped to handle these changes than smaller ones. The ongoing trend of unbundling costs and increasing transparency means AMCs must constantly prove their value and efficient operations to justify fees.