The Securities and Exchange Board of India (SEBI) has introduced a series of measures to protect mutual fund investors and curb mis-selling. This is with a sharp focus on reducing portfolio overlaps across different schemes.
New Disclosure Rules
As per the latest circular, SEBI has directed Asset Management Companies (AMCs) to disclose category-wise portfolio overlap on their websites on a monthly basis. Specifically:
- Equity schemes must disclose overlaps with other equity schemes
- Debt schemes must disclose overlaps with other debt schemes
- Hybrid schemes must disclose overlaps with other hybrid schemes
"Mutual Funds shall disclose category-wise portfolio overlap levels. Such disclosure shall be published on the AMC website for investor communication on a monthly basis," SEBI stated.
Additionally, for sectoral and thematic equity schemes, SEBI has mandated that no more than 50% of the scheme’s portfolio should overlap with other equity schemes in the same category. This is except for large-cap funds. Portfolio overlaps will be calculated quarterly using the average of daily portfolio overlap values. And AMCs have been given up to three years, depending on scheme categories, to meet the new criteria and realign portfolios.
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Portfolio Overlap: A Hidden Risk
Portfolio overlap occurs when multiple schemes hold largely identical stocks, creating hidden concentration risk. This can reduce diversification benefits and increase volatility, as underperformance in one fund may mirror in others with overlapping holdings.
"Portfolio overlap reduces the true benefit of diversification. When multiple mutual fund schemes hold the same stocks, the portfolio may appear diversified… exposure may be concentrated in a limited set of companies. This can lead to stock-level concentration risk, higher volatility than expected, and a simultaneous fall in multiple schemes during market corrections," said Pankaj Mathpal, CEO of Optima Money Managers.
High Overlap Across Top Mutual Funds
As per an analysis which used PRIME Database, shows that there are several schemes from top AMCs with portfolio overlaps exceeding 50%. Some notable examples:
| Mutual Fund House | Scheme A | Scheme B | Overlap % |
|---|---|---|---|
| AXIS | AXIS Business Cycles Fund | AXIS ELSS Tax Saver Fund | 54.46% |
| AXIS | AXIS Business Cycles Fund | AXIS Large & Mid Cap Fund | 51.15% |
| AXIS | AXIS Business Cycles Fund | AXIS Value Fund | 55.01% |
| DSP | DSP ELSS Tax Saver Fund | DSP Large & Mid Cap Fund | 78.05% |
| DSP | DSP ELSS Tax Saver Fund | DSP Large Cap Fund | 53.10% |
| HDFC | HDFC ELSS Tax Saver | HDFC Focused Fund | 67.59% |
| HDFC | HDFC Large & Mid Cap Fund | HDFC Multi Cap Fund | 56.70% |
| ICICI Prudential | ICICI Prudential Business Cycle Fund | ICICI Prudential Large Cap Fund | 77.51% |
| Kotak Mahindra | Kotak Contra Fund | Kotak ELSS Tax Saver Fund | 55.24% |
| Kotak Mahindra | Kotak Contra Fund | Kotak Focused Fund | 55.92% |
These numbers are based on the weightage of holdings of listed Indian companies in the equity schemes and cover the top 10 mutual funds by MAAUM.
Can Overlap Occur Across Different AMCs?
Yes. Overlap is not limited to schemes of the same AMC. Reasons include:
- Common investment philosophy within AMCs
- Centralized research teams and model portfolios
- Popularity of high-quality or large-cap stocks across the market
"A multi-cap and a flexi-cap fund of the same AMC may hold several common stocks. Two flexi-cap funds from different AMCs may have similar top holdings. Therefore, overlap is not just AMC-specific; it is often market-driven," Mathpal explained.
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How Investors Can Manage Portfolio Overlap
While it is impossible to eliminate overlap completely, experts recommend limiting it to around 30%. Key strategies include:
- Avoid investing in multiple schemes from the same AMC
- Diversify across categories such as large-cap, mid-cap, and small-cap funds
- Hold 3–5 carefully selected schemesfor optimal diversification
"Certain large-cap and market-leading stocks tend to appear across multiple schemes. However, investors can manage and limit excessive overlap by diversifying across categories. Investors should aim to limit portfolio overlap to a maximum of 30%," Mathpal advised.
With these new SEBI measures, investors will have greater transparency on portfolio overlaps, allowing them to make more informed decisions and reduce hidden concentration risks in their mutual fund investments.
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