Portfolio concentrationMarket regulator Securities and Exchange Board of India (SEBI) has issued a circular that details portfolio concentration norms for exchange traded funds (ETFs) and index funds. This move is in line with SEBI’s agenda of protecting investors’ interest. The norms specified by SEBI, issued on January 10, 2019, will help in addressing risk related to portfolio concentration in ETFs and index funds. Funds having high concentration of a particular stock run high risk as a slight hit to investor sentiment in that sector or that stock can result in significant losses in the funds.

Here are the norms that mutual funds need to adopt:

• The underlying index of any ETF or index fund shall have a minimum of 10 stocks as its constituents.
• For a sectoral/ thematic Index, no single stock shall have more than 35% weight in the index.
• For other than sectoral/ thematic indices, no single stock shall have more than 25% weight in the index.
• The weightage of the top three constituents of the index, cumulatively shall not be more than 65% of the Index.
• The individual constituent of the index shall have a trading frequency greater than or equal to 80% and an average impact cost of 1% or less over previous six months.

The above rules are applicable to all ETFs and index funds. SEBI has advised fund houses to evaluate and ensure compliance with above mentioned norms on a quarterly basis. They also need to ensure that the updated constituents of the indices (for all its ETFs/ index funds) are available on the website of such ETF/index fund issuers at all points of time. All the existing ETFs/index funds are given a period of three months for aligning with above norms.

Here are some of the Nifty indices having high concentration to one company:

Index Name Company Name Weightage (%)
Nifty Bank Index HDFC Bank 36.2
Nifty PSU Bank Index State Bank of India 71.84
Nifty FMCG Index ITC Ltd 41.57
Nifty Infrastructure Index L & T Ltd 36.38
Nifty Energy Index Reliance Industries Ltd 58.32

Data as on Dec’18 – As per monthly reports available on NSE

Priyanka Bharati

Priyanka Bharati is a senior personal finance analyst with RupeeIQ. She can be reached on priyanka.bharati@rupeeiq.com