SEBI Mulls Limits on New Passive Fund Launches

The Securities and Exchange Board of India (SEBI) is reportedly considering imposing limits on the number of passive mutual funds that can be launched within a single category. This potential policy change aims to mitigate investor confusion stemming from the rapid proliferation of such funds in the market.

Understanding the Current Landscape

Currently, asset management companies frequently launch multiple passive funds based on similar strategies, such as various momentum funds tracking different market capitalizations. Unlike active funds, which adhere to a stricter ‘one fund per category’ rule, passive funds, designed to mirror an index, face no such restrictions.

• Over 130 new passive funds were introduced in the past year.
• This compares to 86 active funds launched during the same period.
• As of July, passive fund assets in India reached ₹15.5 trillion.
• Passive funds constituted 18% of total mutual fund assets in July, up from 10.2% in March 2021.

Major players like SBI Mutual Fund, ICICI Prudential Mutual Fund, and HDFC Mutual Fund exemplify this trend by offering multiple passive products. This growth highlights the increasing presence of passive strategies in the Indian market.

The Regulatory Perspective

The significant surge in passive fund launches suggests that SEBI’s existing categorization rules for active funds might inadvertently be encouraging the introduction of more passive products. By considering new limits, SEBI seeks to address this imbalance and provide greater clarity for investors.

These discussions are still preliminary, but the move underscores SEBI’s intent to ensure a structured and less confusing environment for mutual fund investors in India.