SEBI Circulars — Recent Important Changes
SEBI changes mutual fund rules through regulations and circulars, which are collected in a Master Circular. This lesson walks through the main changes in force by October 2026: the 2026 Regulations, expenses, categories, the riskometer, side pockets and folio rules.
How the rules change
SEBI works through two kinds of instrument. Regulations set the framework, and circulars add the operating detail; the circulars are collected in a Master Circular. Anyone reading older books has to check which version of a rule is current.
The largest recent change is the framework itself. The SEBI (Mutual Funds) Regulations, 2026 replaced the 1996 Regulations from 1 April 2026 and are read with the Master Circular of 20 March 2026.
Expenses
The total expense ratio (TER) is now the base expense ratio (BER) plus brokerage, transaction cost and statutory levies such as GST. The BER covers the investment and advisory fee, recurring expenses and distribution charges. Brokerage sits outside the BER, capped at 0.06% of trade value in the cash market and 0.02% in derivatives. Exit load is separate from TER.
Two older allowances have gone. The extra 0.05% for schemes with an exit load and the extra 0.30% for inflows from B-30 cities both ended on 31 October 2025.
Categories and the riskometer
SEBI's circular of 26 February 2026 reset scheme categories to 40 and added Life Cycle Funds; existing schemes had to comply by 26 August 2026. For sectoral and thematic funds, portfolio overlap with other equity schemes is capped at 50%.
The riskometer has six levels, from Low to Very High. It is reviewed every month from the scheme's actual portfolio, so it can change when the holdings change. It is not fixed by the scheme's category, its past returns or the fund manager's opinion.
Side pockets, nomination, pooling and folio lock
A segregated portfolio, or side pocket, may be created on a credit event: a debt holding is downgraded below investment grade or defaults. It is optional, must be provided for in the SID and needs trustee approval. Unitholders on that day get equal units in the segregated portfolio. It cannot be used for a general market fall.
A single holder must either nominate or expressly opt out; for joint folios nomination is optional. Distributors and platforms may not pool investors' money or units in their own accounts. From 30 April 2026 an investor may choose to lock a folio.
These rules improve disclosure. They do not reduce market risk.
Rules at a glance
A side pocket in a debt scheme (illustrative)
A debt scheme's SID provides for segregated portfolios. One bond it holds defaults, and with the trustees' approval the fund house moves that bond into a segregated portfolio. Rohan, who holds 5,000 units of the scheme on that day, now holds 5,000 units of the main portfolio and 5,000 units of the segregated portfolio.
Had bond prices simply fallen across the market, with no downgrade below investment grade and no default, no side pocket could have been created.
Adding up a TER (illustrative)
- Assumptions for the arithmetic only: a scheme's base expense ratio is 1.50% a year, its brokerage and transaction cost together are 0.05%, and statutory levies are 0.20%.
- TER = 1.50% + 0.05% + 0.20% = 1.75% a year.
- On a holding worth ₹2,00,000 through the year: 1.75% × ₹2,00,000 = ₹3,500.
Result. The TER is 1.75%, which is ₹3,500 a year on ₹2,00,000; any exit load is separate from it.
Key points
- TER = BER + brokerage + transaction cost + statutory levies; brokerage is capped outside the BER.
- The 0.05% and 0.30% extra expense allowances ended on 31 October 2025.
- There are 40 scheme categories, including the new Life Cycle Funds.
- The riskometer has six levels and is reviewed monthly from the actual portfolio.
- A side pocket is optional, needs an SID provision and trustee approval, and is created only on a credit event.
Common misunderstandings
- The extra 0.30% for B-30 cities and 0.05% for exit-load schemes are not current: both ended on 31 October 2025.
- A riskometer level is not fixed by the category: it follows the actual portfolio and is reviewed monthly.
- A side pocket is not a response to a falling market: it needs a credit event, a provision in the SID and trustee approval.
- Nomination is not compulsory for a single holder, but doing nothing is not an option: the holder nominates or expressly opts out.
Questions people ask
Is exit load part of the TER?
No. TER is the base expense ratio, brokerage, transaction cost and statutory levies. Exit load is separate.
Is a folio locked automatically?
No. The folio lock is a voluntary facility, available from 30 April 2026, that an investor may choose to use.
What does the bar on pooling mean in practice?
An investor's payment goes to the mutual fund and redemption proceeds come back to the investor without resting in an intermediary's account. It does not stop a distributor from receiving commission.
What this lesson relies on
- SEBI (Mutual Funds) Regulations, 2026 — regulations 66 and 67 (expenses)
- SEBI Master Circular for Mutual Funds (20 March 2026) — categorisation (circular of 26 February 2026), riskometer, segregated portfolios, nomination and pooling
This lesson was reviewed independently against these sources on 8 October 2026. Rules change: check the current regulation, scheme document or policy wording before relying on any figure. This is education, not advice.