Overlapping mutual funds reduce your returns: Here is how to fix risk

Portfolios repeating the same investments can lead to non-representation of certain parts of the market

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Mutual funds are popular among investors seeking to diversify their money and rely on expert fund managers. But there's a hidden risk: Portfolio overlap. Some investors think that owning several funds means their money is safe because it's spread out. However, if funds invest in the same stocks, it can actually increase risk instead of reducing it. This overlap can weaken the benefits of diversification and may even lower your overall returns.

 

What is mutual fund overlap

 

An overlap occurs when two or more funds in your portfolio invest in the same or similar underlying stocks or sectors. For example, if you own two large-cap equity funds, both may have significant holdings in blue chip stocks like Reliance Industries, HDFC Bank, or Infosys. Instead of spreading your risk, you end up doubling down on the same companies.  Use: SIP Calculator

 

Identifying overlap in your portfolio

 

Check top holdings: Review the top 10 holdings of each mutual fund in your portfolio. If you see the same stocks appearing repeatedly, you likely have significant overlap.

 

Use online tools: Platforms like Value Research, Morningstar, Groww and Dezerv offer portfolio overlap analysis tools. These can quickly highlight overlapping stocks and sectors.

 

Review fund categories: Holding multiple funds from the same category (e.g., three largecap funds) often results in redundancy and overlap.

 

“Investors should follow a few key strategies to reduce mutual fund overlap and improve portfolio efficiency. First, they should diversify across fund categories by selecting a mix of, say, large-cap, mid-cap, and small-cap funds to ensure balanced exposure. Second, investors should analyse the underlying holdings of each mutual fund to identify any overlaps in stocks or sectors and eliminate duplicates by reallocating their investments,” said Hrishikesh Palve, director at Anand Rathi Wealth Limited.

 

“Lastly, they should conduct regular portfolio rebalancing to keep their asset allocation aligned with their financial goals and maintain true diversification over time,” said Palve.

 

“Investors should choose two or three funds under each category and also diversify across fund houses. Buying more funds in the same category might lead to overlapping of portfolios. Or buying schemes from just those 2 fund houses across categories also would not let the investor diversify across the judgement of various fund house philosophies and fund managers,” said Shaily Gang, head -products, Tata Asset Management.