Overlap Cap

Cousin showed me his app on Sunday. Five equity funds, five different names, and he felt spread out.

We lined up the top holdings. Same eight stocks, over and over.

Turns out the regulator has been looking at the same thing. In February SEBI put an actual number on how much two funds are allowed to be the same. A thematic or value fund can now share no more than 50 pct of its portfolio with another scheme before it is treated as a duplicate. Value fund and contra fund from the same house, same 50 pct ceiling. Measured on average daily holdings, checked every quarter, and a scheme still breaching after three years gets merged away.

Read the number again. 49 pct of the same stocks, and the rulebook still counts them as two different funds. A cap set that high is not the regulator being strict. It is the regulator admitting that heavy overlap is normal.

Here is the part that matters for your account. Large caps are carved out of the rule. And large caps are exactly where a normal portfolio doubles up. The eight or nine mega caps that top almost every diversified fund sit right inside that carve out, so two plain large cap funds can share 60 to 80 pct of their book and break nothing.

So the overlap the rule fixes is not the overlap you own. A fund house now has to prove its thematic schemes are less than half the same. Nobody is going to run that check across the four funds sitting in your account.

That one stays with you. Pull the top ten holdings of every fund you hold, lay them side by side, and count the names that repeat. That count is your real diversification. The number of funds was never it