Mutual Fund Overlap: Why It Matters for Your Investments

Investing in mutual funds is one of the smartest ways to build wealth over time. Mutual funds let you pool your money with other investors and get professional management across a wide variety of stocks, bonds, or other securities. But when you invest in multiple mutual funds, something important to watch out for is mutual fund overlap.

So, what exactly is mutual fund overlap? How does it impact your investment portfolio? And why should investors care about it? This article will explore everything you need to know about mutual fund overlap, how to check it, and how to make better decisions when choosing funds for your portfolio.

What is Mutual Fund Overlap?

At its simplest, mutual fund overlap refers to the situation where two or more mutual funds in your portfolio hold some of the same stocks or securities. This means a portion of your investments is essentially duplicated across funds.

For example, if Fund A and Fund B both invest heavily in Reliance Industries, and you own both funds, then your actual exposure to Reliance Industries is higher than it looks just by looking at each fund separately. This is called mf overlap or mutual fund portfolio overlap.

Why Does Mutual Fund Overlap Happen?

Mutual fund overlap happens because many funds may follow similar investment strategies or focus on the same market sectors or stocks. For instance:

• Large-cap funds may all invest in the top 10 to 20 biggest companies in India, causing overlap.
• Sector-specific funds focused on banking, technology, or pharma stocks will naturally have overlapping holdings within their sectors.
• Index funds tracking the same index will have near-identical portfolios.

While some overlap is normal, excessive overlap reduces the benefit of diversification, which is a key advantage of investing in mutual funds.

Why Does Mutual Fund Overlap Matter?

Understanding mutual fund overlap is important because it directly impacts how diversified your portfolio truly is. Diversification is a risk management strategy that spreads your investments across different assets to reduce risk.
When you have overlapping holdings in your mutual funds, you may:

• Over Concentrate your investments in a few stocks or sectors.
• Increase your risk exposure unknowingly because your portfolio behaves like you own more of certain stocks than intended.
• Reduce the benefits of diversification, since you’re not really spreading your risk across different assets.

In other words, if you don’t consider mutual fund portfolio overlap, you might be exposing yourself to higher risks than you realize.

How to Identify and Check Mutual Fund Overlap?

To avoid unintended risks, you need to perform a mutual fund overlap check before investing in multiple funds. Here’s how:

1. Review the Portfolio Holdings

Mutual funds disclose their portfolio holdings regularly, usually monthly or quarterly. Check the top 10 or 20 holdings of each fund you own or want to buy and compare the stocks.

For example, if Fund A’s top holdings include Reliance Industries, HDFC Bank, and Infosys, and Fund B also holds these stocks in significant proportions, there is an overlap.

2. Use Online Tools for Mutual Fund Overlap

Several financial websites and platforms offer tools that calculate mutual fund overlap between funds automatically. These tools analyze the entire portfolio and give a percentage overlap, showing how similar the funds are.

These tools save time and give you an accurate picture of mf overlap without manually comparing each stock.

3. Understand Overlap Percentage

Overlap percentage shows how much of one fund’s portfolio is similar to another fund’s portfolio. For example, a 30% overlap means 30% of the holdings are the same.

Investors should ideally avoid funds with more than 30-40% overlap unless there is a specific reason to hold them.

Types of Mutual Fund Overlaps

There are different ways to look at mutual fund overlap depending on your perspective:

1. Sector Overlap

When multiple funds invest in the same industry sectors like banking, IT, or pharmaceuticals, the portfolio has sector overlap. This can increase sector-specific risks.

2. Stock Overlap

This is when the same individual stocks appear in multiple funds you own. For example, owning multiple funds with heavy weightage in Reliance Industries or TCS.

3. Style Overlap

Funds following similar investment styles, like growth or value investing, may own similar types of companies, leading to overlap.

How to Compare Mutual Funds Overlap

When deciding to invest in multiple mutual funds, you should actively compare mutual funds overlap to maintain true diversification.

Here’s how you can compare mutual funds overlap effectively:

Step 1: Gather Fund Holdings

Get the latest holdings of the mutual funds you want to compare. You can find these on the fund house’s website or on reliable financial portals.

Step 2: Use Overlap Tools

Use overlap analysis tools available on platforms like Moneycontrol, Value Research Online, or Morningstar India. Enter the names of the funds to get overlap percentages.

Step 3: Analyze Overlap Impact

Look at the overlap in stocks and sectors. If the overlap is high, consider whether the additional fund adds value or just duplicates your existing exposure.

Examples of Mutual Fund Overlap

To bring this concept to life, here’s a hypothetical example:

• Fund A and Fund B both invest heavily in banking stocks. They share 60% of their portfolio holdings.
• If you invest ₹50,000 in each fund, your effective exposure to banking stocks is higher than ₹50,000 because the same banking stocks appear in both funds.
• This means your portfolio is less diversified and more vulnerable if the banking sector suffers a downturn.

Benefits of Avoiding High Mutual Fund Overlap

Avoiding mutual fund overlap helps you:

• Achieve true diversification by spreading investments across different stocks and sectors.
• Reduce overall portfolio risk by avoiding excessive exposure to the same assets.
• Ensure your money is invested in a wider range of opportunities, not concentrated in a few stocks.
• Avoid concentration risk, where a few stocks or sectors dominate your portfolio and increase vulnerability.
• Enhance potential for stable returns by balancing investments across varied assets.
• Improve portfolio resilience against market fluctuations affecting specific sectors or companies.
• Make your investment strategy more efficient by minimizing unnecessary duplication.

When is Mutual Fund Overlap Acceptable?

Overlap is not always bad. Sometimes, some overlap is inevitable and even necessary:

• Core-Satellite Approach: Investors keep a core fund (like a broad large-cap fund) and add satellite funds with specific themes. Overlap in core holdings is acceptable.
• Index Funds: Overlap is expected because index funds track the same benchmark.
• Strategic Allocation: Investors may choose funds with some overlap if they want to overweight certain sectors or stocks.

Practical Tips to Manage Mutual Fund Overlap

1. Regularly Review Your Portfolio

Periodically check the holdings of your mutual funds and calculate mutual fund portfolio overlap to avoid surprises.

2. Use Professional Advice

Platforms like SMC Global Securities provide expert advisory services to help you pick funds with optimal diversification and minimal overlap.

3. Mix Different Fund Types

Combine equity, debt, and hybrid funds carefully to reduce overlap, especially in the equity portion.

4. Avoid Overlapping Themes

Don’t invest in multiple funds with similar investment themes or sector focuses.

Common Mistakes Related to Mutual Fund Overlap

Investors often make these mistakes with mutual fund overlap, risking poor diversification:

• Buying multiple funds recommended by different advisors without checking overlap can lead to investing in the same stocks unknowingly.
• Assuming different fund names mean different holdings is misleading; many funds share similar stocks.
• Ignoring sector overlap risks concentrates your portfolio in one industry, increasing risk.
• Overlooking changes in fund holdings over time misses evolving risks and reduces portfolio efficiency.

Avoiding these helps build a stronger, well-diversified portfolio.

How to Interpret Mutual Fund Overlap Results?

Understanding overlap percentages is key to managing risk:

• 0-20% Overlap: Indicates low overlap and good diversification.
• 20-40% Overlap: Moderate overlap; review underlying holdings carefully.
• Above 40% Overlap: High overlap; consider revising your portfolio to reduce concentration risk.

Regularly checking overlap helps keep your portfolio balanced and aligned with your investment goals.

Conclusion

Investing wisely in mutual funds means not just picking good funds but also understanding how they work together in your portfolio. Mutual fund overlap is a crucial factor in this puzzle. Ignoring it may leave you exposed to unnecessary risks and reduce your portfolio’s overall effectiveness.

Before investing in multiple mutual funds, always perform a thorough mutual fund overlap check to ensure your investments are genuinely diversified. Use online tools or consult financial advisors for guidance.

For investors seeking expert help in managing their mutual fund portfolio and minimizing overlap risk, SMC Global Securities offers professional advisory services to help you build a balanced, diversified portfolio tailored to your financial goals.

Author: All Content is verified by SMC Global Securities.