Sebi Weighs Limits On Passive Fund Launches Amid Market Surge

The Securities and Exchange Board of India is weighing whether to limit how many passive mutual funds a single category can hold, as the market sees a sharp rise in such fund launches, according to a Mint report. The move, if it goes through, could help retail investors avoid confusion caused by too many similar-looking index funds and exchange-traded funds.

The discussions are still at an early stage, and it is not certain whether they will lead to any formal policy change.

According to the report, one idea being discussed is whether fund houses should be allowed to run multiple versions of the same strategy. An asset management company can currently launch several momentum funds built on the same underlying idea, one tracking large-cap stocks and another tracking small-caps and regulators are examining whether this needs to be streamlined, the report noted.

A passive fund is designed to mirror an index, such as the Nifty 50, and aims to match its returns rather than beat them. At present, there is no limit on how many passive funds an asset manager can launch. Active funds, where a manager picks stocks in an attempt to outperform the market, face a stricter rule, with only one fund allowed per category except in the case of thematic funds.

Passive Fund Launches Surge

Passive fund launches have risen sharply over the past year. Data from the Association of Mutual Funds in India shows that more than 130 passive funds were launched in the last year, compared with 86 active funds.

Several large fund houses illustrate this trend. SBI Mutual Fund, the country's largest, runs two momentum-based funds, the SBI Nifty Midcap 150 Momentum 50 ETF and the SBI Nifty 200 Momentum 30 Index Fund. Momentum funds typically track stocks that have risen over the past six to 12 months, on the expectation that the trend will continue in the near term.

ICICI Prudential Mutual Fund, the second-largest asset manager, offers a similar pattern using the value factor, which targets undervalued stocks, through its Nifty 50 Value 20 ETF and Nifty 200 Value 30 ETF. HDFC Mutual Fund, the third-largest player, runs three equal-weight index funds, including the Nifty Top 20, Nifty 50 and Nifty 100 versions, each assigning identical capital to every stock in the index regardless of its size.

In February, Sebi had capped portfolio overlap at 50% between sectoral or thematic equity schemes and other equity schemes within the same fund house, excluding large-cap funds. It has also been reported earlier that Sebi's categorisation rules for active funds could push more fund houses toward launching passive products instead.

Passive fund assets stood at ₹15.5 trillion as of July, making up 18% of total mutual fund assets, according to NSE Indices. This is a sharp rise from March 2021, when passive funds accounted for just 10.2% of mutual fund assets, as per Amfi data.