We’ve talked about fund size before. Now SEBI is listening
When big becomes a risk: SEBI’s proposal aims to protect investors from bloated funds and unnecessary duplication. Here’s what’s changing.
Note: This post is specifically relevant for investors residing in India. Others are welcome to read it to understand how mutual fund regulations are evolving in the Indian context, but the implications discussed here apply primarily to Indian investors.
Why this post matters
This is not just a regulatory update.
It’s an invitation to think more deeply about how mutual funds are structured and why blindly chasing high returns or big fund sizes can lead to poor long-term outcomes.
In earlier posts, I highlighted how ballooning AUM (Assets Under Management) can reduce a fund’s ability to generate outsized returns. Now, SEBI (Securities and Exchange Board of India) has acknowledged these concerns and released a consultation paper that aims to introduce more structure, transparency, and accountability to mutual fund launches and mergers.
This post will help you understand:
Why size and duplication can hurt performance.
What SEBI is doing about it.
And what it means for you whether you're a new or experienced investor.
It may take you 10 minutes to read. But if your family’s long-term goals rely on mutual fund investing, this time is well worth it.
For new investors
If you’re just starting out, this post will help you look beyond surface-level narratives like:
“High AUM means safer”
“This fund is new and trending”
“More options mean better choice”
Instead, you'll learn how to assess funds based on structure, intent, and long-term suitability not short-term comfort.
For existing investors
Even if you’ve already chosen your funds, this post will show you:
What to watch out for when a fund underperforms.
How structural problems not just market conditions can impact returns.
Why fund mergers matter, and how they can change the fund manager or strategy you originally signed up for.
The problem: When size becomes a risk
We often assume a ₹50,000 crore mutual fund must be more stable or trustworthy. But very few investors ask:
What happens when a fund becomes too large, too fast?
Even fewer notice when the same fund house launches another scheme in the exact same category with a similar strategy.
Until now.
SEBI has released a consultation paper addressing this very issue. It proposes new rules to limit how and when AMCs (Asset Management Companies) can launch multiple funds in the same category especially when one of them already has significant AUM.
What SEBI is proposing : Clauses 2.6.4 to 2.6.7
Let’s simplify what the consultation paper says:
Clause 2.6.4: Declare merger intent upfront
If a new scheme is launched in the same category, the AMC must clearly state whether a merger is possible later based on AUM conditions.
Why it matters: Avoids surprises. Ensures transparency.
Clause 2.6.5: No duplicate schemes without reason
New schemes with the same investment style can’t be launched unless the existing fund has reached full capacity.
Why it matters: Prevents meaningless duplication. Keeps the market cleaner.
Clause 2.6.6: AUM-triggered merger
Even if the original fund’s AUM declines, a merger can still be triggered but only if it was disclosed at launch.
Why it matters: Adds predictability to what was earlier an arbitrary process.
Clause 2.6.7: Mandatory disclosure of fund manager
If the same category has two different managers, this must be disclosed clearly.
Why it matters: Manager capability affects returns. You deserve to know.
Why this change is important
SEBI is moving from regulating just performance to protecting clarity and intent.
Until now, investors rarely asked:
Why is this new scheme needed?
How is it different?
Who is managing it?
What happens if my fund gets merged?
Now, fund houses will be required to answer these questions upfront.
But understanding the answers is still your responsibility.
The positives
Encourages responsible fund launches
Prevents AMCs from launching copycat funds just to gather AUM.Improves investor transparency
You’ll know who’s managing your money and whether a merger is possible.Brings accountability
Fund houses will need a valid reason to launch new funds in the same category.Protects fund structure integrity
Fewer overlapping schemes means less confusion for investors.
The risks you still need to watch for
You could end up with a manager you didn’t choose
If a fund merger happens, the new manager might have a different approach.Style drift remains a possibility
Even within the same category, investment philosophies can differ post-merger.Execution is not easy
Mergers bring tax implications, operational complexity, and investor anxiety.Regulations are not enough
Your own awareness is still the best defense against poor fund choices.
Why this affects you even if you're not switching funds
This is not just about new fund launches.
It’s about understanding how funds are:
Created
Grown
Sometimes quietly merged or discontinued
If you invest without understanding these structures, your long-term conviction will eventually shake even if performance stays okay.
This proposal is an attempt to bring back that clarity.
My small contribution
Through Stock Market Explainers, I write to unpack complexity without adding noise.
Because the real risk to your financial goals isn't market volatility it’s uninformed decision-making.
If you want to:
Understand mutual fund structures beyond marketing brochures
Learn how fund strategy, size, and management decisions affect your investments
Avoid being blindsided by changes you didn’t even know were possible
Then you're in the right place.
Feel free to ask questions, explore the older posts below, or simply reflect on how your mutual fund decisions are being made.
Earlier posts for context:
So the next time you choose a mutual fund based on past returns or AUM growth, pause and dig deeper. Understand the full picture fund structure, mandate, consistency, and intent before making a decision.
And if your fund isn’t performing well, don’t just rush to redeem it because everyone else is. Add one more layer to your checklist. Seek clarity, not noise.
Let’s build a version of investing where conviction not confusion guides your choices.
Disclaimer: Views expressed are personal and based on my interpretation of SEBI's draft circular. While every effort has been made to ensure accuracy, some aspects may be subject to updates or corrections. If you notice any misinterpretation or factual error, please feel free to reach out , I welcome corrections and constructive dialogue.