Examine how SEBI balances product flexibility against true-to-label discipline in India's mutual fund industry.

Under the SEBI (Mutual Funds) Regulations, 1996 [2], scheme categorisation makes a fund's name a promise. For example, a large-cap active fund must hold at least 80% in large-cap stocks [1]. SEBI now lets equity funds invest up to 35% of their residual portfolio in gold ETFs, silver ETFs and InvITs [1]. This trades a little label purity for flexibility in managing risk, but only within firm limits.

Tools of flexibility

• Freedom in the residual portfolio: gold and silver can rise when equities fall sharply, which steadies funds in volatile markets [1].
• Optional, not mandatory: fund managers "may or may not" use the window, so they keep choice of strategy [1].
• Capital-market depth: SEBI wants more mutual fund money in REITs and InvITs, which channels household savings into infrastructure [2].

Safeguards for true-to-label discipline

• Limited dilution: 35% of a residual of at most 20% is at most ~7% of a large-cap fund, so at least 93% stays equity [1].
• Classification by risk: InvITs are treated as hybrid because of concentration and liquidity risks. In 2025, SEBI proposed moving REITs to equity but keeping InvITs hybrid [2].
• Exposure caps: a scheme can hold at most 10% of NAV in REITs and InvITs combined, and 5% in any one issuer [2].

Gaps that remain

• Unclear labels: because the option is voluntary, two "large-cap" funds may now hold different asset mixes [1].
• Hidden over-exposure: investors who already own gold ETFs may unknowingly double up on metals in their core portfolio [1].
• Liquidity mismatch: 17 of 22 InvITs were privately placed, and 8 had no recorded trading volume in March 2025 [2]. They would be hardest to sell in exactly the crash this rule hedges against.
• Small benefit: equity schemes held only ₹465 crore in InvITs [2], so the gain for infrastructure finance will be modest.

Overall, SEBI's approach is calibrated flexibility: a small, optional, capped window that leaves fund categories intact. Three steps would keep investor trust: fund houses should state upfront in Scheme Information Documents whether they will use the option, they should disclose actual holdings every month, and SEBI should review InvIT liquidity regularly. That would serve SEBI's core mandate of protecting investors.