Does 35% gold, silver and InvIT allocation flexibility make equity mutual funds a better buy? Experts explain

In early 2026, the Securities and Exchange Board of India (SEBI) introduced a significant change in the mutual fund framework, giving equity-oriented schemes greater flexibility to invest part of their non-core allocation in assets beyond equities.

Under the revised framework, eligible equity mutual funds can use their residual portfolio allocation for assets such as gold ETFs, silver ETFs and Infrastructure Investment Trusts (InvITs). The flexibility is subject to the minimum equity exposure prescribed for each mutual fund category.

For example, a scheme with a 65% minimum equity requirement could have up to 35% available for other permitted investments, while a large-cap scheme required to maintain 80% exposure to its core equity universe would have a smaller residual allocation.

What do experts say about the revised framework?

The revised framework could make it easier for fund managers to adjust portfolios as market conditions change. Instead of investors having to independently move money between equities, commodities and other real assets, fund managers can make such adjustments within the scheme, subject to applicable investment limits.

For retail investors, managing these asset-class shifts independently can involve transaction costs and, depending on the investment, potential capital gains tax consequences.

Allowing fund managers to make tactical allocations within the mutual fund could therefore provide investors with diversification across multiple asset classes through a single investment vehicle.

However, the additional flexibility does not mean that every investor will necessarily benefit from a fund using the full available allocation.

Bhushan Wani, Director at Crescent Mutual Fund Distributors, said: “Historically, when equity valuations stretched or market uncertainty loomed, fund managers had limited choices for their residual non-equity cash: they either sat on low-yielding liquid debt or cash equivalents. Under the updated framework, fund houses can deploy up to 35% into precious metals and yield-bearing infrastructure assets directly within an equity mandate. This allows active risk mitigation against equity drawdowns while keeping capital productive.”

“While this flexibility empowers fund managers to smooth the drawdown curve, equity fund returns may slightly diverge from pure benchmark indices during runaway equity bull runs. Investors should evaluate whether their fund manager actively uses this flexibility or maintains a pure equity posture, ensuring alignment with their personal risk appetite and horizon.”

Investors should look beyond the 35% allocation

Experts suggest that investors should not choose an equity mutual fund simply because it has the ability to allocate part of its portfolio to gold, silver or InvITs.

Instead, investors should examine the scheme information document to understand the fund’s investment strategy. Monthly fact-sheets can also help investors track the fund’s actual exposure to different asset classes.

Other factors, including the fund manager’s investment process, consistency, costs and long-term performance record, should also be considered before making an investment decision.

The ability to diversify beyond equities is a portfolio-management tool, rather than a guarantee of higher returns or lower risk.

The new flexibility could also create an unintended concentration issue for investors who already have exposure to several asset classes outside their mutual funds.

Pawan Agarwal, Founder at GoodMoneyMan Associates LLP, said 35% allocation rule “is a flexibility, not a feature. Do not pick a fund because of it”.

“SEBI’s February 2026 categorisation reform lets actively managed equity funds use their residual, non-core portion for gold, silver, InvITs, debt and money-market instruments. The headroom depends on the category. A large-cap fund must hold at least 80% in the top 100 companies, so only about 20% is available. A flexi-cap fund, with a 65% equity minimum, gets the full 35%. Using that window is optional,” said Agarwal.