SEBI Overlap Cap Nudges Mutual Funds Towards Passive
Why in the news
SEBI revised mutual fund categorisation so that schemes within one category stay clearly distinct. Experts expect fund houses to turn towards passive products.
Key facts
- 50% overlap cap for thematic/sectoral funds against other equity schemes; large-cap funds exempt.
- Aim: stop several funds with near-identical portfolios under different themes.
- Overlap means two schemes holding many of the same stocks; AMCs earlier launched multiple similar thematic funds.
Passive funds
- Track an index with rule-based investing: index funds, ETFs, FoFs.
- Benefits: lower expense ratios, transparency, and easier product differentiation without breaching overlap limits.
| Likely innovation | Description |
|---|---|
| Smart beta (factor-based) | Indices on higher ROE, dividend yield, lower volatility or quality metrics |
| Thematic index ETFs | EVs, clean energy, technology; small baskets of 10-20 stocks |
Growth
- AMFI: passive AUM share 7.3% five years ago to about 19.02%.
- US passive funds hold over 50% of mutual fund assets; India may follow, more slowly.
Exam angle
- Cap: 50%; exempt: large-cap funds.
- Terms: smart beta, ETF, FoF, AUM.