Whalesbook
Regulatory Push
Mumbai – India's market regulator is stepping up scrutiny on new fund offers (NFOs) to check for portfolio overlap with existing schemes. This proactive approach is being applied even though draft proposals on overlapping stocks have not yet been formally notified.
In an 18 July consultation paper, the Securities and Exchange Board of India (Sebi) suggested that mutual funds limit the stock overlap to 50% in sectoral or thematic schemes compared to other equity schemes within the same fund house. Large-cap schemes are exempted from this rule.
"Now, whenever a mutual fund files for a thematic NFO, Sebi is asking for a model portfolio and the extent of overlap with the fund house's existing equity strategies," said a person aware of the matter, speaking on condition of anonymity. If the overlap with existing schemes is substantial, Sebi is requesting the rationale behind launching another such fund, according to a mutual fund executive who faced this query anonymously.
Proliferation Problem
Asset management companies (AMCs) often launch thematic NFOs to expand their asset base. However, limited differentiation among these schemes offers little added value to investors. The sheer number of such funds can complicate choices rather than simplify them.
Current regulations permit AMCs to launch one scheme per category, but there is no cap on sectoral and thematic funds. This has led to a rapid increase in their numbers. Last year alone, there were 37 sectoral and thematic fund NFOs, significantly more than the 19 NFOs across the entire equity category, according to the Association of Mutual Funds in India (Amfi).
An examination of the top five thematic funds by assets revealed that three out of five had more than 50% stock overlap with another scheme in their own fund house. This data highlights the industry's challenge with redundant offerings.
Expert Views
Deepak Shenoy, chief executive officer of Capitalmind Mutual Fund, expressed caution regarding generalized caps on overlap. "It's difficult to generalize a cap on overlap in thematic or sectoral schemes, as two funds may overlap entirely by coincidence. For instance, the financial sector forms a large part of the market, so many stocks may recur across different themes not by design but by coincidence. Such restrictions do not help investors and may limit choice," he stated.
The consultation paper also proposes allowing mutual funds to offer both value and contra funds if their portfolio overlap does not exceed 50%. This overlap would be monitored semi-annually. If limits are breached, AMCs would have 30 business days to rebalance portfolios, with a potential extension. Investors would be given an exit option without load if deviations persist.