The Securities and Exchange Board of India’s (SEBI) proposal to allow mutual fund houses to launch a second scheme within the same category—such as large-cap or mid-cap—has triggered a sharp divide among investment advisors and distributors. While some welcome the flexibility, others warn it could unravel the very reforms SEBI undertook in 2017 to simplify mutual fund choices for retail investors.
In its draft circular released on July 18, SEBI suggested that Asset Management Companies (AMCs) be permitted to launch a second fund in any category, provided the first scheme has completed at least five years and has over ₹50,000 crore in Assets Under Management (AUM). The proposal also includes a cap on the Total Expense Ratio (TER) at the scheme level, a move seen as investor-friendly. Public comments are being accepted until August 8.
Concerns Over Clarity and Category Creep
Investment advisors say the move risks reversing years of work toward simplifying the fund universe. “Having multiple schemes in the same category is a step back from the categorisation and rationalisation efforts. The industry has worked hard to align with that structure over the last 7–8 years,” said Amol Joshi, founder of PlanRupee Investment Services.
Sachin Jain of Scripbox also expressed caution. “Fund design and disclosures must prioritize transparency. Two large-cap funds from the same AMC with overlapping portfolios won’t help investors. It creates performance divergence without clear differentiation.”
Distributors echoed similar concerns, particularly for investors using aggregator platforms or investing directly through digital apps. “It’s not just about overlapping funds—it’s about messaging,” said one distributor who requested anonymity. “If SIPs or STPs are redirected to the new fund without clarity, it could lead to confusion and disappointment.”
Joshi also warned that unclear messaging—especially about fund closures—can erode trust among newer retail investors. “Lack of communication can create serious trust issues,” he said.
A Flexible Move for Diverse Investor Preferences?
Some, however, see merit in the move. Santosh Joseph of Germinate Investment Services believes SEBI’s proposal acknowledges investor diversity. “Some want stability in large funds, others prefer agility in smaller ones. This gives AMCs room to meet both types of needs,” he said.
The key, according to proponents, is in how AMCs differentiate the second scheme and communicate clearly with investors about its strategy, risk profile, and suitability.
SIP Continuity in Spotlight
One of the biggest concerns flagged by industry participants is the potential impact on ongoing Systematic Investment Plans (SIPs) in existing schemes. Advisors fear that if AMCs launch a new fund and stop accepting fresh inflows into the original one, it could disrupt investor discipline.
“Many international funds have stopped new inflows but allow existing SIPs to continue. I expect a similar framework here,” said Joshi. “But telling an investor they can’t continue their SIP after years of contribution could really upset planning.”
Joseph added that while the mechanism is not fully defined yet, “logically, SIPs should continue unless investors are asked to re-register. Once the first such second scheme is launched, the industry will know how to handle it.”
Clear Communication Key to Success
Despite diverging views, all stakeholders agreed that SEBI must mandate clear, investor-friendly communication. From fund rationales to SIP transitions, transparency will be critical to avoid confusion and preserve trust.
The consultation window remains open till August 8, and SEBI’s final guidelines are expected to shape how the mutual fund industry balances innovation with investor protection.
