Market regulator SEBI is exploring caps on the number of passive mutual fund schemes, such as ETFs and index funds, that an Asset Management Company can offer. This move aims to curb the rise of overlapping investment products and reduce retail investor confusion. Currently, passive fund assets have reached ₹15.5 trillion, accounting for 18% of the total industry assets.
The Securities and Exchange Board of India (SEBI) is in preliminary discussions regarding new rules to limit the growing number of passive mutual fund schemes. The regulator is concerned about the rapid proliferation of index funds and exchange-traded funds (ETFs) that often offer similar investment strategies, which may confuse retail investors trying to choose the right product.
Passive funds are designed to track the performance of a specific market index rather than trying to beat it. Their popularity has surged significantly, with assets under management in this segment climbing to ₹15.5 trillion. This now represents 18% of total mutual fund assets in India, a sharp increase from the 10.2% share recorded in March 2021. In the last year alone, more than 130 passive funds were launched, compared to 86 new active fund offerings.
Asset Management Companies (AMCs) have been launching multiple passive products, including those based on different factors like momentum or value, or those with equal-weight allocations. For example, large players such as SBI Mutual Fund, ICICI Prudential Mutual Fund, and HDFC Mutual Fund have introduced various factor-based ETFs and index funds to capture different market segments. While this provides more options, it has also led to a market crowded with funds that track indices with high overlapping stock holdings.
Some industry experts have expressed caution regarding a strict cap on the number of funds. There is a concern that such regulations might not fully address the issue of product redundancy. For instance, if a cap is imposed on standard index funds, AMCs could potentially launch funds tracking increasingly niche or less liquid indices to bypass the limit. Critics suggest that regulators might need to focus more on the quality and the underlying logic of the indices themselves rather than just the number of funds.
This consideration comes after SEBI previously acted in early 2026 to curb portfolio overlaps in sectoral and thematic active equity schemes to simplify investment choices for the public. As the discussions remain in the early stages, investors should monitor for any official consultation papers or circulars from the regulator, which will provide more clarity on how these potential limits would be structured and applied to existing and new fund offerings.