Kolkata: Capital markets regulator Sebi (Securities and Exchange Board of India) is concerned with the overlap in mutual funds which occurs when multiple funds in the same portfolio ends up holding the same stocks or sectors. The outcome: unintended concentration rather than diversification. if it happens, it might so happen that if one fund in an individual’s portfolio underperforms, other funds might too. Thus what might look like a diversified portfolio can actually be concentrated.
Last week Sebi introduced various measures to protect the interests of mutual fund investors. One of it consists in asset management companies disclosing on their websites monthly category-wise portfolio overlap data. “Mutual Funds shall disclose category-wise portfolio overlap levels, i.e., equity schemes vs other equity schemes, debt schemes vs other debt schemes, and hybrid schemes vs other hybrid schemes. Such disclosure shall be published on the AMC website for investor communication on a monthly basis,” Sebi mentioned it its circular.
“The overlap condition shall be computed on a quarterly basis using the daily portfolio overlap values, i.e. the average of daily portfolio overlap values over a quarter… for any scheme offering in sectoral/thematic equity category, Mutual Funds shall ensure that no more than 50% of the scheme’s portfolio would overlap with other equity schemes in sectoral/thematic category and other equity schemes categories except for large-cap schemes,” the regulator has said.
Data on overlap
According to reports which did number crunching on PRIME Database information, a number of mutual fund schemes from different AMCs display a lot of portfolio overlap.
Kotak Mahindra Mutual Fund: Kotak Contra fund and Kotak ELSS Tax Saver fund have a 55.24% overlap. Similarly there is more than 50% overlaps between Kotak Contra fund and Kotak Focussed fund; between Kotak Contra fund and Kotak Large & Midcal fund; between between Kotak Contra fund and Kotak Larg Cap fund; between Kotal ELSS Tax Saver fund and Kotak ESG Exclusionary Strategy fund and between Kotak Large & Midcap fund and Kotak Flexicap fund.
Similarly more than 50% overlap exists between three sets of schemes of HDFC Mutual Fund, one of the biggest AMCs of the country. These are HDFC ELSS Tax Saver and HDFC Focussed fund; HDFC Large & Mid Cap fund and HDFC Multi Cap fund and between HDFC Large Cap fund and HDFC ELSS Tax Saver fund.
More than 50% overlap is seen in six sets of funds of Axis Mutual Fund, three sets of funds in DSP Mutual fund, two sets of schemes in ICICI Prudential Mutual Fund etc.
Implications for investors
Portfolio overlap is a risk for investors that most investors have no idea of. he/she might think they are investing in different MF schemes from the same house but might end up indirectly investing largely in the same set of stocks through the different funds. It means if one scheme underperforms, the otrher one can too. Therefore, the investor pays for the risk of unwanted concentration instead of diversification.
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