SEBI weighs capping passive fund launches as index-fund clutter grows

What SEBI is looking at

The Securities and Exchange Board of India is in early discussions on whether to cap the number of passive mutual fund schemes that an asset manager can run within a single category. According to a report by Mint that was picked up widely over the past week, the regulator is examining this after a sharp rise in the launch of index funds and exchange-traded funds that track very similar strategies. One idea reportedly on the table is whether a fund house should be allowed to run multiple versions of the same underlying strategy at all — for instance, several momentum funds built on the same idea, with one tracking large-cap stocks and another tracking small-caps.

This is not a formal proposal yet. Every report on the matter, from Mint's original story to follow-ups by Outlook Business and Asia Asset Management, stresses that discussions are at an early stage and it remains uncertain whether they will lead to any policy change. There is no draft circular or consultation paper in the public domain as of 26 August 2026. What is clear is that SEBI officials and industry participants have been talking about the problem for months, and the passive fund segment has grown large and crowded enough that the regulator now considers it worth addressing directly.

The scale of the problem, in numbers

Passive fund assets — which include index funds, ETFs, and fund-of-funds that track a benchmark rather than trying to beat it — stood at Rs 15.5 lakh crore as of July 2026, according to NSE Indices data, making up about 18 percent of the mutual fund industry's total assets. That is a striking jump: passive assets accounted for only 10.2 percent of industry AUM as of March 2021 per AMFI figures. Over roughly the year leading into August 2026, more than 130 passive fund schemes were launched, compared with 86 active fund launches in the same period. For scale, the entire Indian mutual fund industry's assets under management stood at Rs 85.76 lakh crore as of end-July 2026, having grown roughly threefold in five years and sixfold in a decade.

The specific pattern SEBI is said to be worried about is repetition. Reports point to concrete examples: ICICI Prudential Mutual Fund runs a value-factor strategy through both its Nifty 50 Value 20 ETF and Nifty 200 Value 30 ETF, while HDFC Mutual Fund operates three separate equal-weight index funds — tracking the Nifty Top 20, Nifty 50, and Nifty 100 — each assigning identical capital to every stock in the respective index regardless of company size. None of this is illegal or against any current rule; there is presently no limit on how many passive funds an asset manager can launch, unlike the "one scheme per category" restriction SEBI imposed on active diversified equity funds back in 2017.

Why the passive space became a loophole

That contrast is the heart of the story. SEBI's 2017 scheme categorisation exercise limited fund houses to one scheme per category in actively managed diversified equity funds, precisely to stop the kind of near-identical product flooding that had happened earlier. But that rule left an opening: sector, thematic and passive categories were exempted, because a new index or a new theme could always be argued to be genuinely different. Industry voices have pointed out for a while that this created unlimited scope for new fund launches in the passive and thematic space, since index providers can keep creating new benchmarks even when the underlying stock exposure barely differs from an existing fund.

The result showed up starkly in NFO data. Calendar year 2024 saw a record 202 new fund offers, and most equity NFOs belonged to the sector-thematic or passive categories rather than plain diversified equity, because that was where multiple launches from the same AMC were still permitted. SEBI had already tried to address one part of this in February 2026, when it capped portfolio overlap at 50 percent between sectoral or thematic equity schemes and other equity schemes within the same fund house (excluding large-cap funds). Distributors have noted that this curb worked: thematic NFOs in the active space have slowed to a near-halt since the overlap rule took effect. But that rule applied to active thematic funds, not to passive index funds and ETFs — which is exactly the gap now under discussion. As early as June 2026, reports suggested SEBI was weighing whether to extend the 50 percent overlap cap to index funds and ETFs, at least for sectoral and thematic passive schemes, and to separately restrict how many smart-beta or factor-based schemes a single AMC could offer.

The counter-argument, and why this is genuinely unresolved

Some industry participants are cautious about a blunt cap on the number of funds. The concern is that regulation aimed at quantity rather than substance is easy to route around: if standard index funds face a cap, an AMC could simply launch products tracking more niche or less liquid indices instead, achieving a similar multiplication of near-identical products under a different label. That points to a genuine and unresolved debate — should SEBI regulate the number of schemes an AMC can run, or the design quality and genuine differentiation of the underlying indices themselves? Reports so far don't indicate which way SEBI is leaning, and a senior mutual fund executive quoted in coverage acknowledged that these are industry suggestions and the regulator may choose an entirely different approach.

It's also worth placing this alongside the broader NFO slowdown. Even as passive launches multiplied, overall NFO activity has been subdued: only 89 NFOs collected a little over Rs 13,000 crore in the first half of 2026, and active equity NFO collections fell to a six-year low in the same period, according to Business Standard reporting, even as monthly SIP collections held near Rs 32,000 crore. That combination — weak lump-sum appetite for new launches alongside a continuing flood of passive product variants — is part of why the regulator appears keen to tidy up the passive shelf before it grows further.

What this means in practice

For a long-term investor or an MFD advising one, none of this changes what exists on the shelf today. No scheme is being merged, wound up, or blocked as a result of these discussions, and SEBI has given no timeline for a decision. But it is a useful signal about where the passive fund universe stands: a category that started as a small, simple alternative to active management — a Nifty 50 fund or a Sensex fund — has expanded into dozens of factor, equal-weight, momentum, value and sector-specific variants, many of which overlap heavily in their actual stock holdings even when their names and marketing suggest otherwise. For anyone evaluating a passive fund, the practical takeaway is that the label "index fund" or "ETF" no longer implies a single, plain-vanilla product; it increasingly requires checking exactly which index is being tracked, how concentrated it is, and how much it duplicates something already held elsewhere in a portfolio. Whether SEBI eventually acts to formally limit this proliferation, or leaves it to investors and distributors to sort out through diligence, is something the industry will be watching for in the coming months.