SEBI Mutual Fund Rules 2026: The 80% Equity Floor & Overlap Limits

The mutual fund landscape in India has just undergone one of its most significant structural changes in nearly a decade. In early 2026, the Securities and Exchange Board of India (SEBI) issued a massive update to mutual fund classifications designed strictly to enforce “True-to-Label” investing.

For retail investors, this means the end of misleading fund names and hidden portfolio duplication. For your wealth portfolio, it means an immediate review is required to ensure your capital is actually deployed where you think it is.

The End of “Closet Indexing” (The 80% Rule)

Historically, many specialized funds held a significant amount of standard large-cap stocks or sat on idle cash, diluting their intended strategy. SEBI has now tightened the definitions to prevent this practice, often referred to as “closet indexing.”

Under the new 2026 mandate, the minimum equity floor has been aggressively raised from 65% to 80% for key categories, ensuring they remain fully aligned with their stated investment objectives. This strict 80% minimum equity exposure applies to:

• Value Funds
• Contra Funds
• Dividend Yield Funds
• Focused Funds
• ELSS (Tax Saver Funds)

The Strict 50% Overlap Rule

Investors often buy multiple mutual funds thinking they are diversifying, only to realize both funds hold the exact same stocks. SEBI has introduced a powerful new rule to stop fund houses from launching “copy-paste” schemes.

Asset Management Companies (AMCs) are now allowed to offer both Value and Contra funds concurrently, but a strict 50% maximum portfolio overlap limit is enforced between sister schemes in Sectoral and Thematic categories. Fund managers have a three-year window to align their existing portfolios to comply with this mandate, or they will be forced to merge the overlapping schemes entirely.

Alternative Assets Inside Equity Funds

Another major flexibility upgrade is the inclusion of hard assets. Equity mutual funds are now permitted to allocate a residual portion of their non-equity portfolio (up to 35%) to alternative assets like gold, silver, and Infrastructure Investment Trusts (InvITs). This allows fund managers to utilize internal hedging mechanisms when equity markets become highly volatile, rather than just holding idle cash.