Fund houses face fresh compliance push on portfolio overlap

Synopsis

SEBI now requires fund houses to cap portfolio overlap between sectoral/thematic funds and other equity schemes at 50%, giving them three years to comply. This move aims to enhance diversification and prevent investors from unknowingly holding duplicate stocks across multiple funds. Wealth managers urge investors to also scrutinize their personal portfolios for such overlaps.

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

WHAT IS PORTFOLIO 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.

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WHAT IS THE REGULATORY MANDATE?

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.

HOW CAN INVESTORS CHECK THEIR PORTFOLIOS FOR OVERLAP?

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Overlap is calculated at the individual stock level. 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

WHY IS IT IMPORTANT TO TRACK PORTFOLIO OVERLAP?

Financial planners say tracking overlap helps ensure true diversification and prevents investors from holding the same set of stocks across multiple schemes. For instance, if five funds in a portfolio have heavy exposure to the same few technology stocks, a sector downturn can hit the entire portfolio, negating the benefit of diversification. 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. Finally, high overlap across categories— for example, a flexi-cap or large-cap fund having a 70–75% overlap with a Nifty 50 index fund—may indicate the active manager is closely hugging the benchmark, raising questions about whether active fund fees are justified.

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