SEBI closes children and retirement mutual fund categories, major change in scheme classification

**Securities and Exchange Board of India (SEBI)** issued a circular on February 26, 2026, to close down **solution-oriented mutual fund categories** with immediate effect—including children and retirement funds. Existing schemes (15 children’s funds and 29 retirement funds) will have to stop new subscriptions till January 31, 2026, and will have to merge with other schemes with similar asset allocation and risk profile, after prior approval of SEBI.

This is part of a larger overhaul of mutual fund category creation and rationalization rules that will replace the 2017 framework to increase clarity, reduce portfolio overlap, ensure “true-to-label” alignment and enhance investor transparency. SEBI had proposed changes in July 2025 to address complexity, overlap and limited flexibility in solution-oriented schemes.

Special introductions include:
– **Life Cycle Funds** (New Category): Open-ended, goal-based schemes with a pre-determined maturity and a glide path for life cycle investing (automatic change in asset allocation over time across Equity, Debt, InvITs, ETCDs, Gold/Silver ETFs).
– **Contra Funds** and **Sectoral Debt Funds** (new sub-category): Contra funds are now separate from value funds; Sectoral debt funds target specific sectors (e.g., financial services, energy, infrastructure) with at least 80% in related debt instruments.
– Strict rules: Portfolio overlap limits (especially for thematic/sectoral funds), standard fund of funds (FoF) framework with launch limits for each category, and allowance for gold/silver exposure in equity schemes.

Asset management companies (AMCs) have six months (three years for thematic funds) to align with existing schemes, with a change in name, objective, or benchmark not being considered a change in fundamental attributes. Experts like Nikunj Saraf (CEO, Choice Wealth) welcomed the move and called it a step towards making the industry easier for retail investors, preventing duplication and promoting disciplined product offerings.

These reforms are aimed at adjusting to the changing asset class and reducing confusion in the rapidly evolving mutual fund landscape, while prioritizing investor protection.