The 50% Portfolio Overlap Cap For Sectoral And Thematic Funds Explained

On February 26, 2026, SEBI's Categorization and Rationalization of Mutual Fund Schemes circular introduced a portfolio overlap cap specifically for Sectoral and Thematic equity schemes. No more than 50% of such a scheme's portfolio may overlap with other equity schemes, whether in the same Sectoral or Thematic category or in a different equity category altogether, with one exception.

Overlap with Large Cap funds is not counted against the cap, since Large Cap funds are themselves required to hold 80% in the top 100 companies by market value, and some overlap with the largest, most widely held stocks in the market is close to unavoidable. Sectoral and Thematic schemes may also only be launched against a list of eligible sectors and themes that AMFI updates twice a year in consultation with SEBI.

The same circular gave Value and Contra funds a related but distinct allowance. Previously an AMC could offer only one of the two categories. Now an AMC can offer both, provided the overlap between its own Value fund and its own Contra fund stays at or below 50%. Our earlier article on the 80% minimum equity mandate covers what else changed for those two categories.

Portfolio overlap between two funds is calculated stock by stock. For every company held by both schemes, the calculation takes the lower of the two weights, the smaller of what each fund holds in that stock, and adds those lower weights together across every common holding. A stock that one fund holds at 10% and the other holds at 4% contributes only 4% to the overlap figure, since 4% is the portion genuinely shared between the two portfolios.

To prevent a fund house from trimming an overlapping position for a day or two right before a reporting date, then rebuilding it afterward, SEBI requires the calculation to run on daily portfolio values and be averaged over a full quarter, rather than measured on a single snapshot day. A fund cannot pass the test on paper for one afternoon and drift back above 50% for the rest of the quarter.

Stock (hypothetical example)	Fund A Weight	Fund B Weight	Overlap Contribution
Infosys	18%	18%	18%
TCS	12%	10%	10%
HCL Technologies	10%	8%	8%
Tech Mahindra	8%	9%	8%
Wipro	6%	5%	5%
Persistent Systems	4%	6%	4%

Illustrative figures only, for two hypothetical technology theme funds, not any actual scheme. Adding the overlap contribution column gives a total overlap of 53%, above the 50% cap. A fund pair in this position, if both were Sectoral or Thematic schemes, would need to reduce common exposure or work through the compliance process described below.

The rule targets what has become a familiar pattern: several schemes with different names and different marketing pitches that, in practice, hold much the same stocks in much the same proportions. An investor might hold a technology fund, a digital economy fund, and an innovation fund from three separate launches, genuinely believing each adds something new, while the underlying portfolios share most of their largest positions. Each fund charges its own expense ratio, and none of them are providing the diversification the combination appears to offer.

Portfolio overlap is not only a fee question, it is also a risk question. Two funds with high overlap tend to rise and fall together when their shared sector moves, which means a portfolio built from several overlapping thematic funds carries more concentrated sector risk than the number of funds held would suggest. Reducing overlap between schemes marketed and sold as distinct choices is meant to make sure a portfolio genuinely spread across several thematic funds is actually spread, not concentrated behind different labels.

Different names, different marketing pitches, and much the same stocks underneath. The overlap cap exists because that combination stopped looking like a coincidence.

Fund Pairing	Does The 50% Cap Apply	Note
Two Sectoral or Thematic funds, same or different AMC	Yes	Averaged over daily values each quarter
A Sectoral or Thematic fund versus a Large Cap fund	No	Overlap with the top 100 stocks is treated as unavoidable
A Sectoral or Thematic fund versus Flexi Cap, Multi Cap, Mid Cap, Small Cap, Focused, Value, Contra, or Dividend Yield funds	Yes	The 50% limit applies across equity categories generally
A Value fund versus a Contra fund from the same AMC	Yes	A related but separate allowance that also lets both categories be offered together
A Sectoral or Thematic index fund or ETF versus another passive scheme	Not currently	Reported under review as of June 2026, not yet adopted

Existing Sectoral and Thematic schemes have three years from February 26, 2026, broadly until early 2029, to bring their overlap with other equity schemes down to 50% or below. During that window, fund houses must disclose category wise portfolio overlap on their own websites every month, giving investors a way to check progress rather than waiting for the deadline. A scheme that cannot meet the cap after three years must be merged with another scheme under SEBI's applicable provisions.

A forced merger is not automatically a tax event for the investor. Consolidation of mutual fund schemes carried out under SEBI's mutual fund regulations has, since a 2016 amendment to Section 47, been kept outside the definition of a transfer for capital gains purposes, so units received in a properly structured scheme merger are not taxed at the point of merger itself.

The holding period effectively continues from the original investment, though it remains worth confirming the mechanics of any specific merger once SEBI approves it, since the exemption depends on the merger following the prescribed regulatory process.

This overlap cap currently applies only to actively managed Sectoral and Thematic schemes. Passive versions of the same idea, sectoral and thematic index funds and exchange traded funds, sit outside the rule entirely for now, even though a Nifty IT index fund and a thematic technology ETF can hold nearly the same stocks in nearly the same weights by construction.

Media reports from June 2026 indicate SEBI is considering extending a similar overlap limit to passive thematic and sectoral schemes, and possibly placing limits on how many smart beta schemes a single AMC can launch, as part of a broader effort to slow the pace of near identical new fund launches. Nothing has been finalized, and this is worth watching rather than acting on.

If you hold more than one Sectoral or Thematic fund, particularly from the same fund house, checking the monthly overlap disclosure on that AMC's website is now the most direct way to find out whether you are holding genuinely different exposures or paying two expense ratios for close to the same portfolio.

A high overlap figure is not against any rule today if the scheme is still inside its three year compliance window, but it does tell you something useful about how much real diversification your specific combination of funds is providing right now.

The Large Cap exemption is worth remembering too. It exists because overlap with the largest, most widely owned stocks in the market is structurally difficult to avoid, not because holding a Sectoral or Thematic fund alongside a Large Cap fund carries no concentration risk at all. The cap addresses overlap between funds that are meant to be differentiated from each other, not overlap with the broad market itself.

Status as of July 2026. SEBI's overlap cap took effect with the February 26, 2026 circular, but existing Sectoral and Thematic schemes have three years from that date to actually comply, so most of the adjustment is still ahead rather than behind. Separately, media reports from June 2026 indicate SEBI is weighing whether to extend a similar overlap limit to passive thematic and sectoral index funds and ETFs, which sit outside this rule entirely today. That extension has not been adopted as of this writing and should be treated as a proposal, not a rule.

This article is for general informational purposes only and does not constitute investment, tax, or legal advice. Mutual fund investments are subject to market risk. Regulatory details described here reflect SEBI circulars available as of July 2026, and may change with future notifications. The worked example in this article uses hypothetical figures and does not describe any actual scheme. Confirm the current portfolio overlap of any specific fund through its own monthly disclosure before investing, and consult a qualified tax professional or SEBI registered investment adviser for guidance specific to your situation.

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