Less than 2% schemes have excess overlap 

The Securities and Exchange Board of India’s (Sebi) decision to introduce a mandatory 50% portfolio overlap ceiling to reduce duplication across mutual fund schemes, specifically for thematic/sectoral funds and other equity categories will impact less than 2% of the top 10 fund houses’ mutual fund schemes, according to an analysis by PrimeDatabase. 

Scope of Regulatory Impact

In total, 34 instances out of 2,066 combinations of sectoral and thematic funds with equity schemes have over 50% portfolio overlap between their sectoral and thematic schemes with other equity schemes. In fact, the overlap occurred in only five out of 10 fund houses: SBI MF, ICICI Prudential MF, Kotak Mahindra MF, Axis MF and Aditya Birla Sun Life MF. 

Among themes, business cycle funds and ESG-themed funds have seen the highest excess portfolio overlap with 21 out of these 34 instances involving at least one of the two themes. 

Over half or 16 out of these 34 instances are in schemes of ICICI Prudential Mutual Fund while Axis Mutual Fund has recorded 7 and Kotak Mahindra Mutual Fund has recorded 6 instances of excess portfolio overlap. Fund houses have been given 3 years to comply with this regulation.

Niche Themes

Dhirendra Kumar, CEO, Value Research believes that the high number of instances of portfolio overlap involving business cycle funds and ESG funds reveal lack of value to investors. 

“ESG and business cycle are the loosest themes in the mutual fund universe. With a banking fund or a pharma fund, at least you know where the boundary is. ESG is all about declarations and certifications, the ratings don’t even correlate across agencies,” he said. 

He explained that the business cycle theme is so broad it can justify holding anything at any point. Both these funds end up buying the same stocks like Infosys, HDFC Bank, and Reliance that any flexi-cap fund holds. The label is different, the portfolio is the same. The data showing high overlap is the proof that  these were marketing themes, not investment strategies.

“If these funds are forced to reduce overlap, they either become genuinely concentrated, which means higher risk that most investors didn’t sign up for, or they merge into existing schemes, which is an admission the product never had a reason to exist,” he added. 

A Balasubramaniam, MD and CEO, Aditya Birla Sun Life AMC explains that ESG funds are bound to have an overlap with large cap funds due to their focus on high ESG score observed in these companies. However, he admits that the business cycle funds will need a relook following these new regulations and  develop models to reduce instances of high portfolio overlap with other equity schemes.

Madhu Nair, CEO, Union Mutual Fund said that the high overlap in business cycle fund with a large cap fund or a mid-cap fund could be due to the fact that it is a diversified fund, which can look like large cap or mid cap scheme based on market conditions. He added that the glided path to realign portfolios will make it easier for fund managers to reduce the portfolio overlap.

Kumar added that the real lesson is that most investors don’t need these products. A good diversified equity fund is a superset of all these stories. The fund manager will emphasise the right sectors at the right time without going overboard. Every thematic NFO is ultimately an exercise in artificial demand creation, hyping up some sector and selling a product the customer doesn’t need.