SEBI Examines 50% Portfolio Overlap Rule for ETFs and Index Funds

The Securities and Exchange Board of India (SEBI) is considering bringing certain passive mutual fund schemes under the 50% portfolio overlap rule that already applies to active sectoral and thematic funds, as per news reports.  

According to news reports, the proposal is for thematic and sectoral index funds and exchange-traded funds (ETFs), where the number of similar products has grown over the past few years. 

Growth in Passive Mutual Funds 

The passive mutual fund space has expanded rapidly, with asset managers introducing a large number of new products.  

The number of passive schemes, including overseas funds, has increased fivefold in the last 6 years to around 740.  

Their share in the overall mutual fund industry has also grown from 8% in April 2020 to nearly 40% at present.  

Assets managed by passive funds, including gold and silver ETFs and overseas fund-of-funds, stand at around ₹15 trillion. 

Product Launches Under Scrutiny 

The sharp increase in fund launches drew regulatory attention during 2024, when more than 50 sectoral and thematic funds and around 130 passive funds entered the market.  

Several of these schemes tracked sectors or themes that had already witnessed strong gains, adding to concerns over a large number of similar investment products being offered to investors. 

Smart-Beta Funds Also in Focus 

Apart from thematic passive schemes, smart-beta funds may also come under fresh restrictions.  

As per the report, SEBI is examining whether the number of smart-beta schemes launched by an asset management company should be capped.  

The regulator had also sought feedback from the mutual fund industry while reviewing possible measures for the passive investment segment. 

Read More: Axis and Tata Mutual Fund Temporarily Restrict Large Inflows in Gold Schemes! 

Conclusion 

The passive mutual fund segment has recorded strong growth in both schemes and assets in recent years. The proposed overlap rule could introduce additional checks on new product launches in the category. 

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