SEBI Considers Limits on New Passive Mutual Funds
By Market Desk
India’s SEBI is exploring new regulations to limit the launch of passive mutual funds, aiming to reduce investor confusion amid rapid market growth and product proliferation.
The Securities and Exchange Board of India (SEBI) is engaged in initial discussions about implementing new regulations to cap the proliferation of passive mutual fund schemes. This move aims to mitigate potential confusion among retail investors due to the rapid growth of similar investment products.
The Surge in Passive Fund Popularity
Passive funds, which include index funds and exchange-traded funds (ETFs), are designed to mirror specific market indices. These products have experienced a significant surge, leading to their assets under management (AUM) reaching substantial levels.
- Total passive fund AUM climbed to ₹15.5 trillion.
- Passive funds now constitute 18% of India’s total mutual fund assets, up from 10.2% in March 2021.
- Over 130 passive funds were launched in the last year, compared to 86 new active fund offerings.
Asset Management Companies (AMCs) have introduced a wide array of passive products, often tracking indices with considerable overlap in stock holdings. This has resulted in a crowded market, where many offerings present similar investment strategies to the public.
Industry Concerns and Regulatory Approach
Some industry experts have voiced reservations about the effectiveness of strict caps on the number of funds. They argue that such limits might not fully resolve the issue of product redundancy, as AMCs could potentially launch funds tracking increasingly niche or less liquid indices to circumvent new rules.
These critics suggest that regulators should instead concentrate on the quality and underlying logic of the indices themselves, rather than focusing solely on the quantity of funds. This current consideration by SEBI follows its earlier actions in early 2026 to address portfolio overlaps within sectoral and thematic active equity schemes, aiming to simplify investment choices.
Since these discussions are still in their preliminary stages, investors are encouraged to monitor official communications. Any forthcoming consultation papers or circulars from the regulator will provide crucial clarity on the structure and application of these potential limits.