Some large domestic mutual funds (MFs) are asking market regulator Sebi to revise a rule that prevents them from investing more than a tenth of an equity scheme’s assets in a single stock or equity-related instrument.
The main trigger for the request is that the rule is constraining or will constrain these schemes from increasing their investments in shares of Reliance Industries, usually at the vanguard of a bull rally.
Reliance’s weightage in the benchmark S&P Nifty index of the National Stock Exchange has been on the rise, increasing by over 2% since the beginning of the year.
“It is Reliance that usually leads a bull rally, and if we are constrained, it will obviously affect the performance of our diversified equity schemes,” said a fund manager who is aware of the request to Sebi, made informally at a meeting with officials of MF industry.
The main trigger for the request is that the rule is constraining or will constrain these schemes from increasing their investments in shares of Reliance Industries, usually at the vanguard of a bull rally.
Reliance’s weightage in the benchmark S&P Nifty index of the National Stock Exchange has been on the rise, increasing by over 2% since the beginning of the year.
“It is Reliance that usually leads a bull rally, and if we are constrained, it will obviously affect the performance of our diversified equity schemes,” said a fund manager who is aware of the request to Sebi, made informally at a meeting with officials of MF industry.
The 10% limit does not apply to index funds or sector funds that invest only in companies operating in a particular segment of the economy.
Fund managers said the inability to increase their exposure to Reliance, given the company’s strength on the Nifty and its bellwether status among foreign investors in India, will result in returns from these schemes lagging the benchmark index.
They observed that the weightage of Reliance in the index has been at ‘manageable levels’ of less than 11% in the past five years. But its superior performance relative to the Nifty during the recent bull rally has increased its weightage in the index. Since March 10, Reliance shares nearly doubled in value even as the Nifty rose by a little over 70%.
So far this year, fund managers said several diversified equity schemes have lagged the Nifty by 1-2% because of the rise in Reliance’s weightage.
Several foreign funds have also been hit by the increased weightage, as most investors insist on limiting exposure to a single stock. Some of these funds have set a ceiling on their investments in a single stock to minimise risks, even at the expense of underperforming.
Fund managers said that further growth by Reliance, including its subsidiaries, could result in its weightage in the index rising further. The possibility of its subsidiaries, especially retail, getting listed is expected to be a major catalyst for the stock.
“As of now, the problem is limited to Reliance. But there are a few other stocks that have the potential for a higher index weightage. So, the solution is relaxation of exposure limits on stocks,” said the chief investment officer of a private mutual fund.
Fund managers said the inability to increase their exposure to Reliance, given the company’s strength on the Nifty and its bellwether status among foreign investors in India, will result in returns from these schemes lagging the benchmark index.
They observed that the weightage of Reliance in the index has been at ‘manageable levels’ of less than 11% in the past five years. But its superior performance relative to the Nifty during the recent bull rally has increased its weightage in the index. Since March 10, Reliance shares nearly doubled in value even as the Nifty rose by a little over 70%.
So far this year, fund managers said several diversified equity schemes have lagged the Nifty by 1-2% because of the rise in Reliance’s weightage.
Several foreign funds have also been hit by the increased weightage, as most investors insist on limiting exposure to a single stock. Some of these funds have set a ceiling on their investments in a single stock to minimise risks, even at the expense of underperforming.
Fund managers said that further growth by Reliance, including its subsidiaries, could result in its weightage in the index rising further. The possibility of its subsidiaries, especially retail, getting listed is expected to be a major catalyst for the stock.
“As of now, the problem is limited to Reliance. But there are a few other stocks that have the potential for a higher index weightage. So, the solution is relaxation of exposure limits on stocks,” said the chief investment officer of a private mutual fund.
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