MUMBAI
:
India’s market regulator is closely scrutinizing new fund offers (NFOs) for portfolio overlap with existing schemes, even though its draft proposals on overlapping stocks in mutual fund schemes are yet to be notified.
In an 18 July consultation paper, the Securities and Exchange Board of India (Sebi) proposed that mutual funds ensure that no more than 50% of the stocks held in a sectoral or thematic scheme are the same as those held in other equity schemes, with the exception of large-cap schemes, in the same fund house.
“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, on the condition of anonymity.
If the overlap with existing schemes is much higher while filing the NFO, Sebi is “asking for the rationale behind launching another one”, said a mutual fund executive who was asked the same, on the condition of anonymity.
It’s all the same
While thematic NFOs help asset management companies (AMCs) expand their asset base, limited differentiation among schemes offers little value to investors, with the growing number of such funds ultimately complicating choices rather than simplifying them.
Fund houses are allowed to launch one scheme in each category, while there is no cap on sectoral and thematic funds under current regulations. As a result, in the past year, there were 37 sectoral and thematic fund NFOs, compared with only 19 NFOs across the entire equity category, according to the Association of Mutual Funds in India (Amfi).
To assess the extent of portfolio overlap, Mint examined the top five thematic funds by assets. The data from the mutual fund research platform PrimeInvestor showed that three out of the five thematic schemes had more than 50% overlap with a particular scheme in their own fund house.
While overlap may exist across other AMC schemes as well, we limited the analysis to the top five.
Sebi had noted a significant portfolio overlap in the industry, which, it said, necessitated the introduction of clear limits to prevent schemes from holding similar stocks. However, there has been no visible progress in the consultation process. Mint’s emailed queries to Sebi also remained unanswered.
“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,” said Deepak Shenoy, chief executive officer of Capitalmind Mutual Fund.
Sebi proposals
The consultation paper also proposes allowing mutual funds to offer both value and contra funds, provided the portfolio overlap between the two does not exceed 50% at any point. The overlap would be monitored at the time of NFO deployment and subsequently on a semi-annual basis using month-end portfolios.
If the overlap exceeds the permitted level, AMCs would be required to rebalance portfolios within 30 business days, with a possible extension of another 30 business days approved by the investment committee. If the deviation continues beyond this period, investors would be given an exit option without any exit load.
“Since value and contra funds fall under the same category, it makes sense to have a cap on overlap. It expands opportunities for mutual funds, as current categorization norms allow a fund house to launch either a contra or a value fund. This proposal would allow mutual funds to offer both, provided the overlap is contained,” Shenoy said.
