Sebi overlap rules likely to push MFs to passive funds

Asset management companies (AMCs) may double down and innovate more on passive products following the revision of mutual fund categorization norms, offering investors a wider choice of investment options.

- Apoorva Ajith

Differentiation is mandated in same-category schemes.

Passive funds typically track indexes and don’t require active management. While passive funds have been growing steadily in India, the new cap on portfolio overlap may catalyze greater innovation in such products and their growth.

“The restrictions on portfolio overlap can be a trigger for passive investments. Mutual funds may look at creating differentiated products in passives and improve innovation in the space,” said Archit Doshi, senior vice president at Prabhudas Lilladher Capital Group.

As fund houses start offering more passive funds, investors may benefit by getting access to a wider variety of lower-cost options.

The Securities and Exchange Board of India (Sebi) mandated fund houses on 26 February to ensure that schemes offered by them within a category are meaningfully differentiated. The market regulator capped the portfolio overlap between thematic and sectoral funds and other equity schemes at 50%, excluding large-cap fund.