SEBI’s 50% Portfolio Overlap Rule

Context:

The Securities and Exchange Board of India (SEBI) has tightened norms for thematic and sectoral mutual funds by introducing a 50% portfolio overlap cap within schemes of the same fund house.

According to an analysis by Elara Securities, the move is set to trigger portfolio restructuring across multiple schemes.

What is the 50% Overlap Rule?

• Thematic and sectoral schemes within the same asset management company (AMC) cannot have more than 50% common holdings.
• The objective is to:
  • Ensure scheme differentiation
  • Avoid duplication of investment strategies
  • Protect investor interests
  • Improve transparency and product clarity

Key Findings from Elara Securities Report

• 51 sectoral and thematic schemes currently breach the 50% overlap threshold.
• However, the majority show only marginal breaches.
• Only 13 schemes (excluding those with assets below ₹1,000 crore) have overlap exceeding 52%.
• These schemes will need to rebalance portfolios over a three-year glide path.

Why SEBI Introduced the Rule

1. Reduce Product Duplication
   Many AMCs were launching multiple thematic funds with similar portfolios, leading to internal competition and investor confusion.
2. Strengthen Risk Differentiation
   High overlap reduces diversification benefits and exposes investors to concentrated sector risks.
3. Improve Transparency and Governance
   The reform aligns with SEBI’s broader objective of streamlining mutual fund categories and enhancing disclosure norms.