End of Similar Portfolios: Decoding SEBI’s 50% Overlap Rule

The Indian Mutual Fund industry has expanded rapidly in recent years, with fund houses launching a wide range of schemes across categories. While this has provided investors with more choices, it has also created a new challenge: portfolio overlap. Many funds within the same category often end up holding the same stocks in similar proportions, reducing meaningful diversification for investors who own multiple schemes. To address this issue, the Securities and Exchange Board of India (SEBI) has introduced a rule that limits portfolio overlap between schemes to 50 per cent within the same asset management company.

Understanding Portfolio Overlap

Portfolio overlap refers to the percentage of common stocks held by two mutual fund schemes. If two funds have a high overlap, investors who hold both may unknowingly be concentrating their investments in the same companies. This reduces the benefit of diversification and increases risk if those common holdings underperform.

In the absence of such checks, investors might believe they are diversifying by investing in multiple funds, while in reality their exposure remains largely concentrated in the same set of stocks.

What the 50 per cent Cap Means

The new framework aims to ensure that different schemes offered by the same fund house remain meaningfully differentiated. Under the rule, two schemes managed by the same asset management company should not have more than 50 per cent overlap in their portfolios. The objective is to prevent situations where multiple funds essentially replicate the same investment strategy while being marketed as separate products.

The rule encourages fund managers to maintain clearly differentiated portfolios, ensuring that schemes from the same fund house do not hold nearly identical stocks but instead vary in strategy, stock selection, and sector allocation.

The Securities and Exchange Board of India has stated:

• For any scheme offering in the sectoral/thematic equity category, mutual funds shall ensure that no more than 50 per cent of the scheme portfolio overlaps with other equity schemes in the sectoral/thematic category and other equity scheme categories, except for large cap schemes.
• Mutual funds shall be permitted to offer both Value and Contra schemes. However, mutual funds shall ensure that there is no more than 50 per cent overlap between the portfolios of the Value and Contra schemes.

Benefits for Investors

From an investor’s perspective, this move offers several advantages. First, it improves transparency and ensures that schemes within the same fund house are not merely duplicates of each other. Second, it enhances diversification. Investors who hold multiple schemes from the same asset manager are more likely to gain exposure to different companies and sectors rather than repeating the same bets.

Third, the rule strengthens product integrity in the mutual fund industry by encouraging clearer positioning of schemes. This could also make it easier for investors to understand the role of each scheme within their portfolio.

The Broader Message for Investors

By encouraging differentiated portfolios, the rule helps ensure that investors are not paying for multiple schemes that deliver nearly identical exposures. Checking portfolio overlap across funds can also help ensure that diversification is genuine rather than superficial. In the long run, SEBI’s move is expected to strengthen discipline within the mutual fund industry and promote more thoughtful portfolio construction for both fund managers and investors.