Sebi Limits Mutual Fund Overlap, Mandates Distinct Product Offerings

Sebi Overhauls Mutual Fund Portfolio Overlap Rules

The Securities and Exchange Board of India (Sebi) has introduced stricter norms for mutual fund portfolios, capping overlaps at 50% for sectoral and thematic equity schemes with other equity schemes within the same fund house, excluding large-cap funds. The new rules aim to ensure that mutual funds offer diversified portfolios to investors and do not package the same scrips into different schemes.

Key Changes:

• Sectoral and thematic equity schemes will have to reduce their portfolio overlaps with other equity schemes within the same fund house to 50%.
• Existing schemes have three years to comply with the new rules, failing which they will be mandatorily merged.
• Asset management companies have been given a compliance timeline to ease the transition, with a 35% reduction in excess overlap in the first year, an additional 35% reduction in the second year, and the remaining 30% in the third year.
• Solution-oriented schemes have been discontinued, and existing schemes must be merged with other schemes that have a similar asset allocation and risk profile, with prior approval from the regulator.

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New Fund Categories:

• Lifecycle funds can invest across equity, debt, infrastructure investment trusts (InvITs), exchange-traded commodity derivatives, and gold and silver ETFs.
• Lifecycle funds can be launched with a minimum tenure of five years and a maximum of 30 years, in multiples of five.

Portfolio Allocation:

• Residual portions of portfolios can be allocated across categories, including InvITs, exchange-traded commodity derivatives, gold ETFs, and silver ETFs, within regulatory ceilings.
• Hybrid schemes can invest residual portions in InvITs, exchange-traded commodity derivatives, gold ETFs, and silver ETFs, within prescribed limits.
• Debt schemes will invest residual portions in InvITs, except in overnight, liquid, ultra-short duration, low duration, and money market funds.

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