A mutual fund is one of the best ways to start investing for a beginner. But, mutual fund overlap is a big concern when you invest your hard-earned money. Diversification is the best part of a mutual fund, which makes it beginner-friendly.
As we all know, with a famous saying, “Don’t put all your eggs in one basket.” That’s why a mutual fund is the best way to build a diversified portfolio. So, it reduces the risk of market uncertainty.
But mutual fund overlap can reduce this diversification and affect our return, our financial goal.
After doing lots of research and with my experience, I can help you to understand mutual fund portfolio overlap.
In this article, you will get knowledge of most of the questions about portfolio overlap. Like –
What is mutual fund overlap?
What is mutual fund portfolio?
Why does a mutual fund portfolio overlap?
What are the risks associated with mutual fund portfolio overlap?
How do you check /calculate mutual fund investment overlap? etc.
mutual fund overlap: what is mutual fund portfolio?
Every mutual house creates a basket of financial securities like, stocks, bonds, gold, and other investment options. Professional fund managers manage all these funds. When people put their money into a mutual fund, they combine it with the money of other investors. Mutual funds buy stocks and bonds on behalf of their clients. They build a diverse portfolio to meet the fund’s investment goals and strategies.
Since most equity funds invest in stocks, many of them may have put their money in the same companies. As a trader, you might be happy that your portfolio is spread across different equity funds. But your money may still be in the same set of stocks. This is called “portfolio overlap,” which lowers the amount of diversity in your portfolio and makes it less safe.
what is a mutual fund portfolio?
A mutual fund portfolio consists of a collection of investments in one place. Like stocks, bonds, and shares, in different types of financial assets. The portfolio can be categorized into three types: equity, debt, and balanced/hybrid funds. If the portfolio has more debt instruments, it is considered a debt fund. On the other side, if the portfolio has more equity investments, it is classified as an equity fund. A balanced or hybrid mutual fund is a portfolio that holds both equity and debt instruments. By investing in different types of funds, investors can lower their risk and get better results.
example of mutual fund portfolio overlap
Here’s an example to show you what I mean. We looked at the top 10 holdings (as a proportion of the funds’ AUM) of the three large-cap funds. In the table below, the results are shown –
| HDFC Index S&P BSE Sensex Direct Plan-Growth | ICICI Prudential Bluechip Fund Direct-Growth | Axis Bluechip Fund Direct Plan-Growth |
| Reliance Industries Ltd. | ICICI Bank Ltd. | HDFC Bank Ltd. |
| HDFC Bank Ltd. | Reliance Industries Ltd. | ICICI Bank Ltd. |
| ICICI Bank Ltd. | Larsen & Toubro Ltd. | Bajaj Finance Ltd. |
| Housing Development Finance Corporation Ltd. | Infosys Ltd. | Avenue Supermarts Ltd. |
| Infosys Ltd. | Axis Bank Ltd. | Tata Consultancy Services Ltd. |
| ITC Ltd. | HDFC Bank Ltd. | Infosys Ltd. |
| Tata Consultancy Services Ltd. | Housing Development Finance Corporation Ltd. | Reliance Industries Ltd. |
| Larsen & Toubro Ltd. | Bharti Airtel Ltd. | Larsen & Toubro Ltd. |
| Kotak Mahindra Bank Ltd. | Maruti Suzuki India Ltd. | Kotak Mahindra Bank Ltd. |
| Axis Bank Ltd. | Ultratech Cement Ltd. | Housing Development Finance Corporation Ltd. |
The top 10 stocks are ranked by how much of the fund they make up.
You can see that many of the top stocks of these funds are the same. This shows how stock overlap is a problem. Even if you spread your money across all three of these plans, it will still end up in the same group of companies. This means that your portfolio needs to be diversified more.
Why Does a mutual fund portfolio Overlap?
There are many things that can cause mutual fund stock overlap. Here are a few of the most well-known:
Category-Wise Mandate by SEBI
The SEBI rules about where and how much mutual funds can spend are the main causes of portfolio overlap. In the table below, these are the most common types of stock funds.
SEBI Orders for Popular Types of Equity Funds
| Large-cap funds | Minimum 80% investment in large-cap stocks |
| Large and mid-cap Funds | Minimum 35% investment in large-cap stocks and 35% in mid-cap stocks |
| Mid-cap funds | Minimum 65% investment in mid-cap stocks |
| Small-cap funds | Minimum 65% investment in small-cap stocks |
The table above shows that large-cap funds must put 80% of their portfolios into large-cap stocks. Which are the top 100 companies by market size. Because of this limitation, all large-cap funds have access to the same pool of stocks to Invest.
Because of this, there will likely be a lot of overlap between funds in the same group. And if your portfolio has a lot of one type of investment, like large-cap stocks, a big part of your wealth may be in a few large-cap companies.
Asset Management Company (AMC) Specific Investment Style
This can also happen if all of your funds come from the same AMC. This is because of how AMCs spend their money. All AMCs choose investments based on a set of beliefs and a set of rules. The fund managers do have some preferences that affect how they choose stocks. So, this can cause funds to focus on similar stocks or stocks from the same sectors, even if they are in different categories.
This can cause plans to run into each other. Here are some examples to show you what I mean. We chose SBI, ICICI, and PNB as our three fund companies. Then, we looked at the stocks of three of these fund houses’ five schemes. Lastly, we explored how much of a scheme’s money is in those stocks. Check out the lists below.
| Allocation to overlapping stocks in SBI’s schemes | ||||||
| Month | SBI Bluechip | SBI Flexi Cap | SBI Growth Opp | SBI Long Term Equity | SBI Multicap | No. of Overlapping Stocks |
| June-23 | 77.29 | 66.95 | 51.58 | 85.01 | 39.10 | 34 |
| May-23 | 80.08 | 70.23 | 56.73 | 86.19 | 40.80 | 37 |
| April-23 | 78.22 | 71.32 | 55.06 | 86.18 | 40.76 | 36 |
| Mar-23 | 79.83 | 75.93 | 52.92 | 87.01 | 45.10 | 39 |
| Feb-23 | 81.48 | 80.35 | 46.33 | 87.31 | 41.57 | 35 |
| Jan-23 | 82.73 | 80.79 | 48.54 | 88.98 | 32.65 | 36 |
*Note – the above table is a hypothetical example.
| Allocation to overlapping stocks in ICICI’s schemes | ||||||
| Month End | ICICI Flexi Cap | ICICI Large and Mid Cap | ICICI Multi Cap | ICICI Taxsaver | ICICI Top 100 Fund | No. of Overlapping Stocks |
| June-23 | 83.13 | 49.20 | 46.89 | 90.81 | 90.60 | 49 |
| May-23 | 82.76 | 48.50 | 46.71 | 89.97 | 89.75 | 47 |
| April-23 | 84.38 | 48.98 | 47.63 | 88.15 | 89.57 | 47 |
| Mar-23 | 88.61 | 49.85 | 45.03 | 88.04 | 92.72 | 49 |
| Feb-23 | 88.95 | 53.97 | 46.91 | 86.37 | 93.72 | 49 |
| Jan-23 | 84.40 | 59.04 | 45.85 | 80.43 | 91.73 | 49 |
*Note – the above table is a hypothetical example.
| Allocation to overlapping stocks in PNB’s schemes | ||||||
| Month End | PNB Active | PNB Flexi Cap | PNB Large & Mid Cap | PNB Large Cap | PNB Tax Plan | No. of Overlapping Stocks |
| June-23 | 70.33 | 85.45 | 82.09 | 84.53 | 87.50 | 33 |
| May-23 | 68.79 | 91.18 | 90.15 | 97.38 | 86.98 | 39 |
| April-23 | 75.47 | 95.87 | 98.51 | 98.47 | 91.58 | 39 |
| Mar-23 | 73.81 | 97.54 | 96.05 | 0.00 | 88.24 | 37 |
| Feb-23 | 75.18 | 81.32 | 88.64 | 0.00 | 79.34 | 33 |
| Jan-23 | 72.72 | 85.99 | 87.44 | 0.00 | 76.10 | 29 |
*Note – the above table is a hypothetical example.
Based on the above tables, if you had put Rs. 1,000 into each of the 5 SBI Mutual Fund schemes, about Rs. 3,200 of your Rs. 5,000 would have gone into stocks that were in more than one scheme. Again, this causes you to put most of your money into a few popular stocks.
Industry Focus:
There may be an overlap in the portfolios of mutual fund plans that put a lot of money into one sector or business. For example, the portfolios of two mutual funds that spend much in the pharmaceutical industry may overlap.
Stock Focus:
Mutual funds that hold a few high-confidence stocks are more likely to cross with other mutual funds that hold the same stocks.
Market Cap Preference:
Mutual funds that invest in stocks with a certain market size may have similar portfolios. Because the mutual funds invest in related stocks. Examples are large-cap, mid-cap, or small-cap stocks.
Why is mutual fund portfolio overlap important? | Effects of Mutual Fund Overlap
There are several Effects of Mutual Fund Overlap over an investor return. That is why another question can come to your mind. That is, “What are the risks associated with mutual fund portfolio overlap?”.
Mainly mutual fund overlap can hurt an investor’s portfolio diversification.
Here are some ways that can affect portfolio overlap, such as:
- It reduces the benefits of diversification because it makes it easier to put all your money into a few stocks or industries. When the assets that cross do poorly, this can make the market more volatile and make it easier to lose money.
- When mutual funds overlap, the investor may have to pay more because they may be paying fees to multiple fund managers to manage the same assets.
- Suppose the investor needs to sell shares in multiple overlapping funds at the same time. In that case, the selling pressure on the common holdings can affect the market prices of the other funds.
All of these things can be bad because if something bad happens to any of those companies, it could have a big effect on your wealth. This is why you should look at how your interests overlap and try to cut it down.
What to do if you identify an overlap in your portfolio?
Don’t worry if you find that you have put in two mutual funds that are too similar. You can combine your holdings by selling some units of funds that have a lot in common. Also, you can use the money to buy units in funds that have different investments. Spreading across asset types, such as stocks, bonds, and gold, is also a great idea.
How can you identify mutual fund portfolio overlap?
The best way to find out if two or more mutual fund portfolios cross is to look at what each of them owns. You can see if the mutual funds’ portfolios overlap by different factors. Which factors are their top stocks, how they divide their money between sectors, and how much their markets are worth.
Online, you can find tools like Morningstar and Value Research that can help you find overlap in your mutual fund account.
How to check the Mutual Fund Scheme Portfolio?
The details of a mutual fund scheme’s stock can be found on the website of the Fund House or other online platforms.
The other sites can be two types –
Finance content platform for research and news. Like money control, value research online, Tickertape, etc.
Sebi Brokers or advisor platforms. Like Groww, Coin by Zerodha, Upstox, Et money, etc.
How do you calculate mutual fund portfolio overlap?
To find out how much a mutual fund’s portfolio overlaps with other funds’ portfolios. Compare the funds’ shares to find stocks or other assets owned by more than one fund. Look at the funds’ ownership reports or prospectuses, look at each security, and figure out which ones are owned by more than one fund. Find the number or percentage of assets that meet to figure out how similar they are and how much your portfolio is diversified or concentrated. By evaluating similarities, you can learn about risks and find chances to diversify.
How much overlap is bad for you?
If the overlap between portfolios is more than 60–70%, then the portfolio is less diversified. You have to look at the funds again and either combine them into one or choose different funds with less overlap.
Mutual fund portfolio overlap tool
The mutual fund portfolio overlap tool lets you compare the portfolios of two or three stock funds and find out how similar they are. There are no limits on the types of funds you can look at here, and you can compare links between active and dormant funds from different types. You can choose to compare how 2 or 3 mutual funds meet.
The overlap between mutual funds is based on the most up-to-date monthly fund holdings.
Top 5 tools to check mutual fund portfolio compare or overlap for free
There are several number of free tools available in the market.
Based on my knowledge and experience, I list below the top 5 tools to check mutual fund portfolios compare or overlap for free.
How Can You Avoid / Reduce Mutual Fund Portfolio Overlap?
When engaging in mutual funds, it’s important to keep in mind that some overlap is standard and to be expected. But it can be bad if there is too much overlap. Here are some tips to make sure to reduce your funds overlap:
Find out the holdings of each mutual fund scheme
Before you put money into a mutual fund, you should look at its top stocks, its weighting by industry, and its exposure. Once you know what each fund’s investments are, you can avoid spreading your money across funds that hold similar investments.
Diversify Across Mutual Fund Categories
By spreading your investments across different types of funds can reduce stock overlap. As the stock world changes, the chance that your investments will overlap also reduces if you buy funds from different groups.
Let’s look at the portfolio overlap between large and mid-cap funds to show this.
Funds from different categories that are held at the same time
| Mutual Funds Name | Number of stocks in the portfolio | Number of overlapping stocks |
| HDFC Midcap Opportunities Fund | 63 | 7 |
| ICICI Prudential Bluechip Fund | 71 | 7 |
*Note – The above table is only for example.
The above table shows that the two funds both hold 7 of the same stocks. As per percentages, you can say that almost 10% of the ICICI Prudential Bluechip Fund stocks are the same as the HDFC Midcap Fund. There is a catch, though. If you look at how much of these funds’ assets are in these stocks, ICICI Prudential Bluechip Fund only has 2%. In comparison, HDFC Midcap Opportunities has 13%.
So, investing in more than one type of mutual fund is one way to build a diverse portfolio and reduce portfolio overlap.
Diversify across asset classes:
Spread out your investments among different types of assets, like – stocks, bonds, and commodities. Examples –
- Index funds
- Equity Funds / ETF
- Gold funds
- Balanced Funds
- Debt Funds
- Sector funds
- REIT Mutual Funds
- Infrastructure Investment Trusts (InvIT)
This can reduce the effect of conflict in any one asset class.
Diversify across sectors:
Spread out your investments across different businesses or areas. This can help ensure that your mutual funds don’t invest in the same sectors.
Invest through multiple AMCs
You can buy funds from different AMCs to ensure your portfolio has different investments than one fund house. Don’t get all of your funds from the same AMC. This will help reduce portfolio overlap and give your portfolio another layer of diversity.
Use online portfolio management tools
Today, you can keep track of your portfolio with the help of several helpful mobile apps and online tools. With these tools, you can look at a fund’s stock before investing in it. You can also compare new funds to those you already own, find places of overlapping, and ensure funds don’t intersect.
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Why is diversification important to reduce Mutual Fund Overlap? | Benefits of Diversification in Mutual Fund Portfolio
Diversification is an important part of investing that can help lower risk and increase profits. Diversification in mutual fund buying means having a portfolio with various securities. By spreading out their investments, investors can get many benefits, such as:
Cutting down risk:
One of the best things about having a lot of choices is that it can help lower risk. Investors can reduce the effect of any one security on the whole portfolio by having a lot of different securities in their portfolio. If one security doesn’t do well, gains in other securities could make up for the loss.
Increasing returns:
Diversification can increase returns in addition to reducing risk. It should have a mix of securities with different levels of risk. So that investors can get higher returns from riskier securities and the stability of less risky securities.
Taking advantage of market trends:
Investors can also use diversification to take advantage of market trends. For example, stocks in one area are doing well. In that case, they may be included in a diversified portfolio, which can increase returns. On the other hand, if a certain sector isn’t doing well, a varied portfolio may have less exposure to that sector, which can help keep losses to a minimum.
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Giving a chance to different types of assets:
Diversification lets investors gain exposure to different asset types, such as bonds, stocks, and real estate. Each asset class has its own risk and return potential, and investors can get the most out of all of them by having a mix of them.
When investing in mutual funds, what should you think about?
There are a few important things to think about when investing in mutual funds:
Investment Goal:
Find out your financial goals and how willing you are to take risks. So that they match the fund’s goal, which could be growth, income, or a mix of the two.
Track Performance Record:
Look at the fund’s past success over different periods to see its consistency and compare it with other funds that do the same thing.
Fees and Expenses:
Learn about the expense ratio and any other fees that come with the fund. Over time, high costs can have a big effect on your returns.
Fund Manager’s Expertise:
Check out the fund manager’s experience, track record, and investment theory to see if they can consistently get good results.
Diversification:
Check the fund’s holdings to ensure it has a good mix of assets, industries, and locations.
Risk Assessment:
Look at the fund’s risk profile, which includes how volatile it is, how concentrated it is, and how many different market groups it is exposed to.
Investment Style:
Check to see if the fund’s way of investing (such as value or growth) fits with your own way of investing and long-term goals.
Fund Size and Liquidity:
Think about the fund’s size and liquidity to ensure it can handle your investment amount and is easy to buy or sell.
Fund Expenses:
Look at the expense ratio and any other fund fees, as smaller fees can help your returns better over time.
Regulatory Compliance:
Check to see if the fund is regulated and listed with the right regulatory bodies to ensure transparency and investor protection.
Remember, thorough research and seek professional advice before making investment decisions are important.
Final thoughts –
When mutual fund portfolios overlap, the benefits of variety can be cut down. Even though it can’t be completely removed, investors should try to reduce it as much as possible. You can keep your finances in good shape by avoiding conflict in mutual fund portfolios. This goal can be reached by investing in a wide range of groups and fund houses. You can avoid getting stuck by keeping an eye on your portfolio and carefully researching and comparing new mutual funds. Instead, you can build a portfolio with many different types of investments.
If you a mutual funds investor, you can check the health of your portfolio for free on ET Money. It will look at your portfolio based on up to 12 different factors. Like asset allocation, portfolio results, and management fees, and tell you exactly what is wrong with it.
I hope this article helps you get started on your financial journey towards your financial growth.
That’s all, my friend.
I’m Goutam Sil,
I hope the above information will help you a lot.
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