SEBI Proposes Dual Mutual Funds in the Same Category to Ease Scalability and Protect Investors

The Securities and Exchange Board of India (SEBI) has suggested permitting mutual fund houses to introduce a second scheme in the same fund category—such as large-cap or mid-cap—under certain restrictions, a move that could drastically alter India's ₹46-lakh rupee mutual fund industry. Public comments on the draft circular, which was published on July 18, 2025, are welcome until August 8.

Invest in Indian Markets and Unlock Future Potential With 5paisa!

Open Account Now

Key Proposal Details

Currently, SEBI restricts mutual fund companies to just one scheme per category to avoid investor confusion. However, with some funds growing extremely large—crossing ₹50,000 crore in assets under management (AUM)—fund managers have raised concerns about operational challenges such as portfolio rebalancing, trade execution, and maintaining liquidity.

To solve this, SEBi has suggested:

• Fund houses only introduce a second scheme in a category if the first one has been in place for at least five years and has an AUM of more than ₹50,000 crore.
• Existing investors may continue to participate in the original scheme after the second one launches, but new investments (both lump sum and fresh SIPs) will no longer be accepted.
• To ensure investor fairness, the new fund's Total Expense Ratio (TER) cannot be higher than the original's.
• To help differentiate between the two schemes and lessen investor confusion, naming conventions such as "Large Cap Fund – Series I" and "Series II" are recommended.

Industry Response

For the most part, the mutual fund industry has embraced SEBI's proposal. It is seen by fund managers as a practical solution to scaling issues. The CEO of WhiteOak Capital, Aashish Somaiyya, stated that having a second fund would reduce operational stress because overseeing a fund worth more than ₹50,000 crore can become difficult.
 
Comparing it to hotel guests eating breakfast at different times, Anil Ghelani of DSP MF clarified that permitting SIPs to move or continue in a new scheme would not result in major logistical problems.

Investor Concerns

Despite the operational relief this move provides fund houses, some financial experts are concerned about the impact on older schemes. Kirtan A Shah, founder of Credence Wealth, pointed out that closing the original fund to new inflows could lead to performance issues due to continuous redemptions and a lack of fresh capital.

Others caution that investors may flock to newer schemes with better liquidity, leaving older ones vulnerable to outflows. SEBI, however, maintains that only two schemes per category will be allowed, and fund houses may merge them in future if needed.

Additional Proposals

• SEBI’s draft also includes over 20 other proposals:
• Refinement of debt fund naming
• Clarification on value/contra versus thematic categories
• Rules regarding residual investments in REITs and InvITs

Conclusion

The draft framework from SEBI is a sensible move meant to preserve investor confidence while allowing mutual funds to grow efficiently. SEBI guarantees the protection of investor interest by establishing explicit terms and financial restrictions for the introduction of a second scheme. But before final implementation, things like SIP continuity and what happens to closed funds will need to be carefully considered.