Synopsis: SEBI isn’t waiting for new regulations; it’s already tightening the reins on thematic and sectoral mutual fund NFOs. By focusing on “portfolio overlap,” SEBI is making it more difficult for fund houses to introduce new schemes. Growing AUMs through new NFOs has just become much tougher.
India’s market regulator, SEBI, is tightening its grip on New Fund Offers (NFO), particularly those sectoral and thematic mutual funds that seem to keep emerging. And they’re not even waiting for their draft rules on portfolio overlap to be finalized.
Essentially, SEBI wants to ensure that when an asset management company launches a new mutual fund, it isn’t simply replicating something they already offer. This change puts real pressure on fund houses. Now, rolling out new NFOs won’t be as simple or as quick. Growing their assets under management (AUM) by launching similar-sounding thematic funds will now become a lot more difficult.
What SEBI is checking and why it matters?
In a consultation paper released on July 18, SEBI proposed that mutual funds shouldn’t allow more than half of the stocks in their sectoral or thematic schemes to overlap with stocks in other equity schemes from the same AMC. The only exception to this is large-cap schemes.
Although these rules aren’t official yet, SEBI is already enforcing them. People familiar with the process say that whenever an AMC submits a new thematic NFO, SEBI asks for a model portfolio and checks exactly how much it overlaps with the AMC’s other equity funds.
If SEBI feels the overlap is too much, they don’t ignore it. They require the AMC to explain it, basically asking, “Why are you launching a new fund if it’s just going to hold the same stocks?”
This is important as sometimes AMCs use thematic NFOs to increase their assets under management. But if all these schemes are similar, investors don’t really get more choices. Instead, it just creates confusion, with many funds that have different names but almost identical portfolios.
Why is SEBI worried about thematic fund duplication?
Currently, mutual fund houses are restricted to launching just one scheme per category, but this restriction doesn’t apply to sectoral and thematic funds. As a result, the market has seen a surge in new thematic fund offerings.
AMFI data reveals that, over the past year, there were 37 new sectoral and thematic fund launches, while only 19 new funds were launched across the entire equity category. Fund houses are heavily focusing on the thematic and sectoral segments. In fact, it is found that three out of five thematic schemes had more than 50 percent overlap with another scheme in their own fund house.
SEBI is concerned about this “significant overlap” in the industry. The regulator says that a clear cap is necessary so funds don’t end up with similar stocks under different schemes. However, there has been little progress on finalizing the consultation paper.
Value vs Contra: another SEBI proposal with stricter monitoring
SEBI wants to allow AMCs to manage both value and contra funds, but there’s a condition that the overlap between the two can’t exceed 50 percent at any time. They plan to monitor this overlap when a new fund is launched, and then review it every six months by checking how the portfolios compare at the end of each month.
If the overlap goes over the limit, the AMC has 30 business days to correct it. If they need additional time, they get another 30 days. If it’s still not resolved, investors will have the option to exit without any exit load.
What does this mean for AMCs?
SEBI’s move to tighten overlap checks could really disrupt how AMCs use thematic and sectoral NFOs to drive their growth. Not too long ago, launching a new thematic fund was almost like taking a shortcut to making quick money. But now, if SEBI starts scrutinizing overlap at the filing stage, AMCs will have to put in more effort.
They’ll need to rethink their portfolios, clearly show what makes each scheme unique, or even cancel some launches altogether. That means slower approvals and fewer new funds making it to the market, and slowing down those rapid AUM increases that everyone’s gotten used to.
For investors, this is mostly a positive change as it reduces confusion and improves transparency. But for AMCs, it’s a headache that is more paperwork, more back-and-forth, and less of that easy fundraising from NFOs.
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