SEBI’s 50% Rule: Will Your Mutual
Funds Be Forced to Merge?

Bonvista Financial Services Pvt. Ltd.

10 Mar, 2026

For the protection of investors in mutual funds and to avoid mis-selling, the Securities and Exchange Board of India (SEBI) has implemented several policies. This is done with a strong emphasis on minimizing portfolio overlaps between various methods.

Let’s see the new Disclosure Rules for AMCs:

In accordance with the most recent circular, SEBI has mandated that Asset Management Companies (AMCs) post monthly information about category-wise portfolio overlap on their websites.

In particular:

Equity schemes with other equity schemes must disclose overlaps
Overlaps must be disclosed by Debt schemes with other debt schemes
Overlaps must be disclosed by Hybrid schemes with other hybrid schemes

Recently, SEBI stated that "Mutual Funds shall disclose category-wise portfolio overlap levels. Such disclosure shall be published on the AMC website for investor communication on a monthly basis,"

Furthermore, SEBI has stipulated that no more than 50% of the portfolio of sectoral and thematic equity schemes overlap with other equity schemes in the same category. Large-cap funds are an exception to this rule. The average of the daily portfolio overlap values will be used to compute portfolio overlaps on a quarterly basis. Additionally, depending on the scheme category, AMCs have up to three years to realign their portfolios and meet the new requirements.

Why Portfolio Overlap is a Risk?

When several schemes own nearly identical stocks, this is known as portfolio overlap, and it can lead to hidden concentration risk. Because underperformance in one fund may be reflected in others with overlapping holdings, this can lessen the benefits of diversification and increase volatility.

The actual advantage of diversity is diminished by portfolio overlap. The portfolio may appear diversified when several mutual fund schemes own the same equities, yet exposure may be concentrated in a small number of businesses.

Let us see a few examples of two Mutual Fund Schemes of the same AMC with High Overlap, i.e., approx. more than 50%:

Fund House & Schemes	Overlap %	Common Stocks
DSP ELSS Tax Saver vs. Large & Mid Cap	76.26%	58
ICICI Prudential Business Cycle vs. Large Cap	68.89%	45
HDFC ELSS Tax Saver vs. Focused Fund	64.47%	22
AXIS ELSS Tax Saver vs. Large Cap	63.19%	45
DSP Flexi Cap vs. Focused Fund	59.24%	25
HDFC Large & Mid Cap vs. Multi Cap	55.82%	95

Portfolio as of 31.01.2026

Source: https://www.advisorkhoj.com/

Portfolio Overlap also happens across different AMCs, as there can be a common investment philosophy for different schemes and some popular Blue-chip stocks across the market.

For example, a flexi-cap and multi-cap of the same/different AMCs can hold common stocks, or two flexi-cap funds from different AMCs may also have similar top holdings. Therefore, overlap is not just AMC-specific.

How can Portfolio Overlap harm Portfolio Diversification?

Investment Detail	Fund A	Fund B
Investment Amount	₹1,00,000	₹1,00,000
Common Holdings	HDFC Bank, ICICI Bank, Infosys	HDFC Bank, ICICI Bank, Infosys
Overlap Status	High (Potential Merger)	High (Potential Merger)

For example, portfolio overlap is 80%, and you make an investment of Rs. 2,00,000/-, but you invest in the same holdings.

Suppose the banking sector falls by 20%. As both the schemes have similar stocks, the total portfolio loss would be Rs. 40,000/-.

On the other hand, if you invest in two schemes having lower portfolio overlap as under,

Fund	Investment	Major Holdings
Fund A	Rs. 1,00,000	HDFC Bank, ICICI Bank, Infosys
Fund B	Rs. 1,00,000	Reliance, TCS, HUL

For example, portfolio overlap is 20%, and you make an investment of Rs. 2,00,000/-, but you invest in the same holdings.

Suppose the banking sector falls by 20%. As both the schemes have similar stocks, the total portfolio loss would be Rs. 20,000/-. Loss is half compared to high overlap portfolio.

This is true diversification.

How Can Retail Investors Manage Portfolio Overlap?

Although total elimination of overlap is unachievable, experts advise keeping it to about 30%. Important tactics consist of:

Steer clear of investing in more than one AMC scheme.
Invest in a variety of fund types, including large-cap, mid-cap, and small-cap funds.
To achieve the best diversification, hold three to five carefully chosen plans.

Some market-leading and large-cap stocks frequently show up in several schemes. However, by diversifying across categories, investors can control and restrict excessive overlap. It is recommended that investors try to keep portfolio overlap to no more than 30%.

Investors will be able to make better judgments and lower hidden concentration risks in their mutual fund investments thanks to the increased transparency on portfolio overlaps provided by these new SEBI regulations.