The Securities and Exchange Board of India (Sebi) is considering potential limits on the number of passive mutual funds per category, two people aware of the matter said, as a flood of passive funds sweeps across the market.
Such curbs, if introduced, could reduce confusion for retail investors by reducing the number of repetitive passive funds such as index funds and exchange-traded funds. However, the discussions are in early stages and may or may not result in policy action.
“There were discussions around whether the industry could streamline the number of similar strategies. Like, an asset management company (AMC) can have multiple funds all running essentially the same momentum fund, but one with large-caps and then one with small-caps—there is some thinking around whether that could be streamlined,” one of the two people cited above said on the condition of anonymity.
A passive fund is an investment fund that mirrors an index such as the Nifty 50, aiming to match market returns. Currently, there is no cap on the number of passive funds an asset manager can launch. On the active side, where a fund manager selects stocks to beat market returns, only one fund per category is permitted, except for thematic funds.
Launches of passive funds have picked up significantly. Over 130 passive funds were launched in the past year compared with 86 active funds, according to data from the Association of Mutual Funds in India (Amfi).
Top fund offerings
SBI Mutual Fund, India’s largest mutual fund house, has two funds based on the momentum factor: SBI Nifty Midcap 150 Momentum 50 ETF and SBI Nifty 200 Momentum 30 Index Fund. Momentum funds are passive funds that typically track stocks that have surged over the past six to 12 months, betting they will continue gaining in the short to medium term.
ICICI Prudential Mutual Fund, the second-largest asset manager, has similar funds in the value factor, targeting undervalued stocks. It offers ICICI Prudential Nifty 50 Value 20 ETF and ICICI Prudential Nifty 200 Value 30 ETF.
HDFC Mutual Fund, the third-largest asset manager, offers HDFC Nifty Top 20 Equal Weight Index Fund, HDFC Nifty 50 Equal Weight Index Fund and HDFC Nifty 100 Equal Weight Index Fund. Equal weight index funds assign the same, identical percentage of capital to each stock in the index, regardless of their market cap.
These examples highlight how asset managers can launch multiple passive funds that follow similar investment factors but track different underlying indices. To be sure, the similarity in passive indices is not limited to the top three funds.
Will it work?
However, experts contend that curbing the number of funds per category won’t work.
“An index can be built to order; so, almost any theme can be repackaged as a passive product. Capping scheme numbers won’t stop that,” said Dhirendra Kumar, founder and chief executive officer at Value Research. “It will only push fund houses into narrower and thinner indices. The filter should be the index itself: how many stocks, how liquid, how replicable, not how many funds an AMC runs.”
An email sent to Sebi remained unanswered.
In February, the market regulator capped portfolio overlaps at 50% for sectoral and thematic equity schemes with other equity schemes within the same fund house, barring large-cap funds. Mint reported in March that Sebi’s categorization rules for active funds may lead to a surge in innovation and launches of passive products.
Passive fund assets stood at ₹15.5 trillion and made up 18% of mutual fund assets as of July, according to NSE Indices. They accounted for 10.2% of mutual fund assets as of March 2021, according to Amfi.