​Can Sebi’s 50% overlap limit improve diversification in mutual fund schemes?​

Markets regulator Sebi has mandated that schemes within the same fund house cap portfolio overlap at 50% for sectoral and thematic funds vis‑à‑vis any other equity scheme within the same AMC. Here is what it means, as reported by ETBureau.

Fund houses have three years to comply. Wealth managers say investors, too, should check for overlaps in their own portfolios to avoid duplication.

Sebi has mandated that mutual fund schemes, particularly sectoral and thematic funds (excluding largecap funds), must limit portfolio overlap to 50% with other equity schemes within the same AMC.

The aim is to reduce duplication and improve diversification. Existing schemes have a three-year window to comply. AMCs are also required to publish monthly disclosures on their websites showing categorywise overlap. The overlap will be calculated quarterly based on the average of daily overlap levels.

Overlap is calculated at the individual stock level. Example - If Scheme A and Scheme B both hold 5% in Reliance Industries, that 5% is counted as overlap. If Scheme A holds 8% in HDFC Bank and Scheme B holds 5%, the overlap contribution is 5%, the lower of the two holdings. This is aggregated across all common stocks to arrive at the total overlap.

Portfolio overlap measures how many identical stocks or securities are common across two or more mutual fund schemes. While investors often buy multiple funds for diversification, a high overlap means they are effectively holding the same stocks under different fund names, defeating the purpose of diversification.

Financial planners say tracking overlap helps ensure true diversification and prevents investors from holding the same set of stocks across multiple schemes. High overlap also means investors are paying management fees to multiple fund managers for essentially the same bets. A leaner portfolio of two to three schemes with low overlap is often more efficient.