The scorching rally in Reliance Industries Ltd’s (RIL) shares is becoming a problem for India’s equity mutual funds.

The stock has more than doubled from a March low, thanks to Chairman Mukesh Ambani’s fundraising blitz. The run up has increased the company’s weighting in the S&P BSE Sensex to 17.4 per cent, from 11 per cent at the end of 2019.

Money managers have hit a regulatory wall because of the surge. They can’t buy more of India’s most valuable company as actively-run plans aren’t allowed to own more than 10 per cent of a single stock. This means funds can’t add rising stocks, such as Reliance, and therefore risk trailing the market, said Nilesh Shah, managing director of Kotak Asset Management Co.

Clients don’t understand this technicality so its hard to explain to them why a particular fund is under-performing, said Shah, who is also chairman of the Association of Mutual Funds in India. Funds have no option but to book profits in such cases to comply. We have asked SEBI (Securities and Exchange Board of India) to allow us to align our holdings with changes in the stocks weighting.

Listless performance has been one of the reasons behind the waning popularity of equity funds in recent months, with many individuals taking direct bets on a market that has erased a bulk of the virus-induced losses. Large-cap funds have risen 8 per cent on average over the past six months, data on Morningstar Investment Advisers website show. The Sensex is up 9 per cent in the same period.

Reliance’s shares rose 12 per cent to a record last week, lifting the company’s market value past the $200 billion mark, as people familiar said Amazon.com Inc and KKR & Co are in talks to buy stakes in its retail business.

But money managers trimmed their combined holdings in Reliance by five million shares worth Rs 1030 crore in August, making it the most sold stock by value, Edelweiss Financial Services Ltd. said in a note Friday.

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