On this article, SEBI RIA Abhishek Kumar evaluations SEBI’s Draft Round on Revised MF Categorisation Guidelines.
Concerning the writer: Abhishek is a part of a freefincal’s curated listing of fee-only monetary advisors and a fee-only India member. He might be contacted by way of his web site, sahajmoney.com.
If 8 out of 10 shares in your funds are the identical, are you diversified or duped? SEBI is attempting to settle this query.
Image a crowded buffet the place each dish seems to be completely different however tastes suspiciously the identical. That’s what occurs within the funding world: to remain within the high tier, energetic fund managers usually find yourself holding the identical set of shares and generally in practically similar proportions as their opponents—totally defeating the aim of investing in energetic funds to beat passive ones.
Warren Buffett calls this the “institutional crucial.” You may’t totally blame fund managers; they, too, have higher-ups to report back to, and in the event that they diverge too removed from friends, unitholders might abandon their funds for these which might be quickly outperforming. It’s a bit like college students copying the category topper so their dad and mom don’t scold them with, “Have a look at Sharma ji ka beta. He topped the category and also you didn’t.”
The result’s “false diversification,” the place portfolios overlap closely. SEBI has observed this, and it’s one purpose it launched a session paper final week that might have a long-lasting affect on India’s ₹ 74-lakh-crore mutual-fund universe. Massive-cap funds usually share 70 – 80 % of their holdings, so traders are successfully piling additional helpings of the identical recipe. In the meantime, different asset lessons resembling REITs, InvITs, and so forth are ignored. SEBI’s draft goals to cut back these overlaps and deepen the market throughout asset lessons.
What are the foremost modifications proposed by SEBI ?
Some of the vital proposals introduces strict portfolio overlap limits. Presently, fund homes can provide both a Worth fund or a Contra fund however not each. The brand new guidelines would permit each, however with a vital catch: not more than 50% of their portfolios can overlap. For sectoral and thematic fairness schemes, the identical 50% overlap restrict applies when in comparison with different schemes within the class (excluding large-cap funds).
This overlap monitoring would occur on the time of New Fund Affords (NFOs) and subsequently on a semi-annual foundation. If funds exceed the permitted overlap, asset administration firms should rebalance inside 30 enterprise days or face the consequence of providing traders an exit possibility with none exit load.
Maybe essentially the most debated proposal permits mutual fund homes to launch extra schemes inside present classes. This may break the sacred “one scheme per class” rule that has ruled the trade since 2017. The situations are stringent: the present scheme have to be over 5 years outdated with belongings exceeding ₹50,000 crore, and it should cease accepting new investments after the extra scheme launches. This might create “orphan funds” the place the unique scheme solely faces redemptions, probably hurting present traders.
Lastly, the draft proposes permitting mutual funds to speculate their money holdings in a diversified combine together with REITs, InvITs, gold, and silver devices. This might present fund managers with extra instruments to optimize returns whereas sustaining the fund’s core funding mandate.
How does this have an effect on common unitholders?
Essentially the most alarming difficulty is what occurs to traders who stay within the authentic scheme as soon as a Sequence 2 launches. With solely redemptions and no new inflows, managers could also be compelled to promote belongings at unfavourable instances, hurting returns. As AUM shrinks, fastened prices are unfold over a smaller base, additional eroding efficiency which successfully penalizes persevering with traders.
Paradoxically, the rule might reward underperforming giants. A big-cap fund with ₹ 60,000 crore in AUM however poor five-year returns might launch a Sequence 2 with the identical technique but a clear efficiency slate. New traders see upside with out the luggage, whereas the AMC nonetheless earns charges on the outdated fund it will get an incentive for “empire constructing” slightly than real innovation.
An investor holding three large-cap funds for diversification would acquire readability on overlaps, but when one of many fund home launches a Sequence 2 fund, the investor should resolve whether or not to change or keep within the now-orphaned scheme. This two-tier therapy relies upon solely on entry timing.
SEBI is accepting public feedback till August 8, 2025; remaining guidelines might arrive late 2025 or early 2026. Current schemes will get six months to realign, so full results might floor by mid-2026. Submit suggestions right here: https://www.sebi.gov.in/sebiweb/publiccommentv2/PublicCommentAction.do?doPublicComments=sure
Conclusion
Whereas SEBI is perhaps aiming to enhance transparency and reduce portfolio overlap, however the proposed remedy dangers making a two-tier system that disadvantages long-time traders whereas letting AMCs bury underperformance with shiny new launches. Retail traders ought to monitor these developments, evaluate overlap knowledge as soon as accessible, and resolve based mostly on AUM thresholds whether or not to remain or change if their fund turns into eligible for a Sequence 2. Above all, pursue real diversification slightly than amassing funds that secretly serve the identical dish.
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