Large-Cap Funds Share a Universe Before They Share a Stock

SEBI’s October 2017 scheme categorisation circular requires every open-ended large-cap equity fund to hold at least 80% of its assets in the top 100 companies by market capitalisation - a list AMFI publishes and every AMC is required to use, identically, twice a year. A large-cap fund at HDFC and a large-cap fund at ICICI Prudential aren’t drawing from two different universes of ideas. They’re drawing from the same 100 names, by rule.

Overlap of 40-70% Is Routine, Not Exceptional

That shared starting universe shows up directly in overlap data. Two large-cap or flexi-cap funds from different fund houses commonly share 60-70% of their holdings; among the largest Indian equity schemes, overlap of 40-70% is routine. Once overlap crosses roughly 50%, the two funds are, for practical purposes, holding the same portfolio with different labels on it.

The Rule Permits It; Manager Behaviour Produces It

The rule doesn’t mathematically force this - a manager restricted to the top 100 stocks could still, in principle, build a 30-stock portfolio with almost no names in common with a rival’s. In practice, that doesn’t happen, because the same constraint that fixes the universe also concentrates analyst coverage and consensus conviction onto the same handful of names within it - the more heavily researched a stock is, the more independently-run funds tend to agree it belongs in the portfolio. The rule makes high overlap possible. Manager behaviour inside that rule makes it common.

This is a reason to check an overlap tool before assuming two large-cap funds diversify each other, not a criticism of the category itself - the same 80% rule is what keeps a “large-cap fund” recognisably a large-cap fund, rather than one that quietly drifts into small caps or new segments the label didn’t promise. It just means the diversification most investors think they’re buying, by holding two large-cap schemes instead of one, is smaller than it looks - because both funds were required to start from the identical list before either manager made a single choice.

Run an overlap check before treating two large-cap schemes as diversification. Both were required to start from the identical AMFI list before either manager made a single choice, and past roughly 50% overlap they are the same portfolio under two labels.