The Securities and Exchange Board of India’s (Sebi) latest proposal to cap overlap between thematic/sectoral schemes with other equity schemes promotes true to label investing to 50% has divided the industry, as some of the industry players believe that the limit should be more than the proposed number.
SEBI’s proposal
The paper said it checked on the overlap amongst the portfolio of various schemes to ensure compliance and noted that in case of some schemes, there was a significant overlap of portfolios.
“It was therefore felt necessary to introduce clear limits to the industry to avoid schemes with similar portfolios,” it said.
Both D P Singh, CEO of SBI Mutual Fund and Prateek Agarwal Motilal Oswal AMC believe that if the portfolio of two schemes is overlapping, how is it true-to-label then? In fact, Agarwal added, “We believe that a 15% overlap can also make a huge difference,” he said.
Dhirendra Kumar, CEO of Value Research said, “The percentage itself is only one piece of the puzzle. What matters most is whether funds are truly different in spirit and substance, not just on paper.
Kumar added that such a move promotes true-to-label investing and helps investors better understand what they’re actually getting when they pick a sector or theme fund.
Important change for AMC
Another key change proposed is allowing AMCs to launch an additional scheme in the existing scheme categories listed above provided that the scheme in the existing category should have completed more than 5 years and have an AUM of more than Rs 50,000 crore among other conditions.
Experts believe that this would break the sacred “one scheme per category” rule that has governed the industry since 2017.
According to Value Research data there are 13 schemes in the equity and hybrid category that have more than Rs 50,000 crore AUM.
Freefincal noted in a review to the consultation paper that this could create “orphan funds” where the original scheme only faces redemptions, potentially hurting existing investors.
The most alarming issue is what happens to investors who remain in the original scheme once an additional scheme is launched. “The investor must decide whether to switch or stay in the now-orphaned scheme,” it said.
Kumar said, this proposal is designed to prevent unnecessary proliferation of similar schemes, which can dilute investor attention and create confusion. “By setting a high AUM threshold, SEBI is signaling that only the most successful and widely held funds should be replicated or offered in multiple variants,” he said, adding this will be required in categories constrained by size.
In a draft circular dated July 18, the market regulator proposed a total of 20 changes in its categorisation of mutual fund schemes. These were originally implemented from November 2020 when Sebi vide its circular standardized the scheme categories and characteristics to bring uniformity, improve comparability, and enhance investor understanding.