SEBI Mutual Fund Categorisation: What Changed and What It Means for Your Portfolio (2026 Update)

Last Updated on April 26, 2026 by Hemant Beniwal

In August 2017, I wrote about SEBI’s mutual fund categorisation announcement and said it was the biggest change I had seen in my then-15-year career in personal finance. Eight years later, that assessment still holds.

The 2018 categorisation changed everything – how funds are classified, how fund managers operate, how performance is evaluated, and most importantly, how investors can compare funds. If you are investing in mutual funds today without understanding the SEBI category your fund belongs to, you are flying partially blind.

What SEBI changed in 2018 – and why it mattered

Before 2018, mutual fund companies had enormous freedom in naming their schemes. A “large-cap fund” from one AMC might hold 40% mid-caps. Another “large-cap fund” from a different AMC might hold 90% large-caps. Investors comparing the two were not actually comparing the same type of product.

SEBI’s October 2017 circular fixed this by mandating that every AMC could have only one fund per sub-category, and every fund must invest according to clearly defined rules for its category.

The five broad groups established by SEBI are equity schemes, debt schemes, hybrid schemes, solution-oriented schemes (retirement funds, children’s funds), and other schemes (ETFs, index funds, fund of funds).

The key equity categories and what they mean

Large-cap funds: Minimum 80% in large-cap stocks (top 100 companies by market capitalisation, as defined by AMFI’s half-yearly list). This is the category most affected by the categorisation – fund managers lost the flexibility to buy mid-cap stocks for alpha generation.

Mid-cap funds: Minimum 65% in mid-cap stocks (101st to 250th company by market cap).

Small-cap funds: Minimum 65% in small-cap stocks (251st company onwards).

Flexi-cap funds: Minimum 65% in equity, with no restriction on large/mid/small allocation. This category was created later (2020) to give fund managers flexibility that large-cap mandates removed.

Multi-cap funds: Minimum 75% in equity, with mandatory minimum 25% each in large, mid, and small cap. This was the 2020 update that surprised markets – SEBI required existing multi-cap funds to either comply by holding small-cap stocks or reclassify.

The most significant consequence: Alpha Gone, Index On

I first wrote “Alpha Gone Index On” in 2018 as a prediction. By 2026, it has become a well-documented reality.

With large-cap fund managers restricted to the top 100 stocks – the same universe that the Nifty 50 and Nifty 100 index funds track – generating consistent alpha above the index has become extremely difficult. Multiple studies of 10-year rolling returns show that over 80% of large-cap active funds underperform their benchmark index on a consistent basis, after expenses.

This does not mean active funds are worthless – mid-cap and small-cap categories still show more consistent alpha generation because the stock universe is larger and less efficiently priced. But in the large-cap space, the case for index funds and ETFs has become very strong.

My current view: include at least 20 to 30% of your equity allocation in a Nifty 50 or Nifty 100 index fund or ETF. This is higher than my 2018 recommendation of 5 to 10%.

The debt fund categorisation – and the 2023 tax change

SEBI’s categorisation also brought clarity to debt funds. Liquid funds are restricted to instruments maturing within 91 days. Long-duration funds must maintain portfolio maturity above 7 years. Ultra-short, short, medium, and long duration categories have specific maturity band requirements.

This clarity matters for risk management. Debt funds with longer durations are more affected by interest rate changes. When RBI raised rates sharply in 2022, long-duration funds fell 3 to 5% – not what investors in “safe” debt funds expected.

However, the most significant change to debt funds came not from SEBI categorisation but from the Finance Act 2023. From April 1, 2023, all capital gains from debt mutual funds (funds with less than 65% in equity) purchased on or after that date are taxed at the investor’s income slab rate – regardless of holding period. The indexation benefit and 20% LTCG rate are gone for new purchases.

This fundamentally changes the comparison between debt funds and fixed deposits. For investors in the 30% tax bracket, debt funds no longer have the post-tax advantage they once did for money held beyond 3 years.

What this means for your portfolio today

Four practical actions based on the 2026 state of SEBI categorisation:

Check what category your fund actually belongs to. Your fund’s monthly factsheet shows its SEBI category. If you have multiple “equity” funds, check whether they are large-cap, mid-cap, flexi-cap, or multi-cap. Knowing this tells you what the fund can and cannot hold.

Rationalise your large-cap exposure. If you have 3 large-cap active funds, consolidate to 1 active large-cap fund and add a Nifty 50 or Nifty 100 index fund. The cost difference (1.5 to 2% for active vs 0.1 to 0.2% for passive) compounds significantly over 20 years.

Don’t abandon active in mid and small-cap. The alpha case is stronger here. A well-managed active mid-cap fund from a disciplined AMC with a consistent investment philosophy is worth the higher expense ratio.

Review your debt allocation with the post-2023 tax reality in mind. For short-term money (under 3 years), liquid and ultra-short debt funds remain useful. For medium to long-term goals, revisit whether debt funds or alternatives (NPS debt, direct bonds, bank FDs for those in lower tax brackets) make more sense.

Also read: ETF and Index Funds in India: The 2026 Guide for Retirement Investors

Frequently asked questions

Has the SEBI categorisation changed how you think about your mutual fund portfolio? Have you shifted any allocation toward index funds as a result? Share your experience in the comments.