12 Aug 2025
Investing in multiple mutual fund schemes is a common strategy to diversify risk and build long term wealth. However, holding too many funds without reviewing their portfolios can lead to an issue known as mutual fund overlap where different schemes invest in the same stocks or sectors. This reduces the actual diversification you may think you have and can increase concentration risk unknowingly. In this article, we explore what mutual fund overlap means, why it matters for your investment strategy, and practical steps to identify and manage it effectively.
Key Takeaways
- Mutual fund overlap occurs when different schemes in your portfolio invest in the same stocks or sectors.
- High overlap can reduce diversification, increase portfolio risk, and complicate rebalancing and tax planning.
- Common causes include investing in similar fund categories, passive index funds, and lack of periodic portfolio review.
- To detect overlap review fund factsheets, compare portfolio holdings, and look for recurring stocks or sectors.
- Reduce overlap by diversifying across different fund types and choosing distinct investment styles.
- Consider tax and cost impacts before switching or consolidating overlapping funds, including exit load and capital gains tax.
- Regular monitoring and informed fund selection can help you maintain a well diversified, cost efficient, and goal aligned portfolio.
What is Mutual Fund Overlap?
Mutual fund overlap refers to a situation where two or more mutual fund schemes held within an investor’s portfolio invest in the same underlying securities. This means that even though an investor may hold multiple funds for diversification, the actual exposure may be concentrated in a limited set of companies or sectors.
For example, if two different equity funds hold significant amounts of the same large cap stocks, such as major banking or technology companies, the investor is essentially taking a repeated position in those stocks. While overlap can be expected to some extent especially in funds within the same category excessive duplication may reduce the effectiveness of diversification and increase portfolio risk. Understanding and managing overlap is important to ensure that the overall investment strategy remains balanced, aligned with financial goals, and suited to the investor’s risk appetite.
Why Overlap Happens?
Mutual fund overlap can occur without the investor even realizing it. This usually happens due to a few common practices:
1. Investing in Similar Fund Categories
Overlap often occurs when investors choose multiple funds from the same category, such as large cap or flexi cap. These funds typically invest in the same group of well established companies, leading to duplication.
2. Common Stock Selection by Fund Managers
Different fund managers may independently identify and invest in the same fundamentally strong or high performing stocks. As a result, even schemes from different AMCs can hold overlapping securities.
3. Passive Funds Tracking the Same Index
Index funds and exchange traded funds (ETFs) that follow the same benchmark index will naturally have similar or identical portfolios, contributing to overlap.
4. Limited Review of Portfolio Holdings
When investors do not regularly assess the underlying holdings of their funds, they may unknowingly build a portfolio with repeated exposure to the same stocks or sectors. This reduces the overall benefit of portfolio diversification in mutual funds.
How to Measure Fund Overlap?
Evaluating mutual fund overlap is essential to ensure your investments are truly diversified and not concentrated in a few common stocks. Here are a few investor friendly ways to assess overlap in your portfolio:
- Review Fund Factsheets: Asset Management Companies (AMCs) publish regular factsheets that list the top holdings and sector allocations of each fund. By comparing these across different schemes, investors can identify common stocks or sectors that may signal overlap.
- Check Portfolio Disclosures: All mutual funds disclose their full portfolio periodically. These are available on the official websites of the AMCs. By cross referencing holdings, investors can check for repetition of stocks and their respective weightages across different funds.
- Look for Patterns in Stock and Sector Exposure: When reviewing portfolios, pay attention to recurring stock names or sector themes across your funds. Even if two schemes seem different by category or strategy, similar holdings can lead to duplication of risk.
Impact of Mutual Fund Overlap
When multiple mutual fund schemes in a portfolio hold similar stocks or sectors, it can reduce the effectiveness of diversification and lead to unintended risks. Here are some key impacts investors should be aware of:
1. Reduced Diversification
The main purpose of investing across different mutual funds schemes is to spread risk. However, when schemes have overlapping holdings, the diversification benefit is weakened.
2. Higher Risk Concentration
Repeated exposure to the same stocks or sectors can increase vulnerability. If these companies or sectors underperform, it could affect the entire portfolio more significantly.
3. Redundant Exposure
Holding multiple funds with similar portfolios adds little incremental value but may increase overall portfolio costs, including fund management charges.
4. Misleading Sense of Diversification
Even if an investor holds several schemes, the portfolio may behave like a single fund if many of them invest in the same companies. This can create confusion when evaluating performance or managing risk.
5. Unnecessary Costs
When similar funds are held together, investors may end up paying multiple expense ratios for portfolios that deliver nearly identical outcomes. This dilutes potential returns without improving diversification.
How to Detect Mutual Fund Overlap?
Identifying overlap in your mutual fund portfolio is an important part of risk management and portfolio review. Here are some effective ways investors can detect overlap across schemes:
- Compare Top Holdings: Start by reviewing the holdings of each mutual fund. If the same stocks appear across multiple schemes, it may indicate duplication.
- Use AMC Portfolio Disclosures: Regularly reviewing portfolio disclosures available on AMC websites can also help detect repeated exposure.
- Observe Return Patterns: If multiple schemes show similar performance during different market phases, it may be due to overlapping holdings. Analysing risk return using Sharpe ratio can give more clarity.
Risks of High Overlap
High mutual fund overlap increases the risk of your portfolio being too focused on a few stocks or sectors. This means that if those particular stocks or sectors do not perform well, your entire investment portfolio may face larger losses.
Instead of spreading out risk, overlap concentrates it, which goes against the basic goal of diversification.
When funds have similar holdings, exiting or switching may trigger unnecessary tax liabilities or exit loads. It also makes it harder to adjust the asset mix effectively, as overlapping funds behave similarly.
Keeping overlap low helps protect your portfolio from such risks and supports long term stability.
Strategies to Reduce Overlap
Whether you invest through SIP or lumpsum, ensure your chosen schemes provide differentiated exposure. Repeating the same category or stocks across both approaches can increase overlap unintentionally. Choose large cap, mid cap, and thematic funds To maintain a well diversified mutual fund portfolio and reduce the risk of duplication, investors can follow these practical strategies:
1. Diversify Across Different Fund Categories
Invest in schemes across different categories such as large cap, mid cap, small cap, multi cap, or sectoral/thematic funds. This helps spread exposure across a wider set of companies and market segments.
2. Select Funds with Distinct Investment Approaches
Choose funds with different fund managers, investment styles, and mandates. For example, pairing a value focused fund with a growth oriented fund can reduce the chance of overlapping holdings.
3. Avoid Multiple Funds from the Same Category
Holding several schemes within the same category (e.g., three large cap funds) often leads to high overlap. Limit the number of funds per category to avoid duplication and maintain clarity in asset allocation.
4. Consider Fund of Funds (FoFs)
Fund of Funds schemes invest in a diversified basket of other mutual funds. These are often structured to reduce overlap and provide balanced exposure to various asset classes or geographies.
5. Regular Portfolio Monitoring
Review your mutual fund portfolio regularly to identify any increase in overlap due to changes in fund holdings or market conditions. Timely adjustments help keep your portfolio aligned with your diversification goals.
6. Be Mindful of Index Funds and ETFs
Passive funds tracking the same benchmark index (like Nifty 50 or Sensex) will have identical holdings. Limit the number of similar index funds to avoid unintended duplication.
Tax & Cost Considerations When Consolidating
When adjusting your mutual fund portfolio to reduce overlap, it is important to be mindful of the associated tax and cost implications:
- Exit Load: Some mutual fund schemes may levy an exit load if units are redeemed within a certain holding period. This cost can impact your overall returns, especially if you are frequently switching between schemes. (*Investor should read Scheme Information document properly)
- Capital Gains Tax: Selling mutual fund units whether to consolidate or rebalance may lead to capital gains, which are taxable based on the type of fund and the holding period. Equity and debt funds are taxed differently, and the applicable tax treatment depends on how long the units were held. For detailed and updated tax guidelines, investors should refer to the Kotak Mutual Fund Tax Reckoner.
- Expense Ratio Consideration: Holding multiple funds with similar portfolios not only increases overlap but may also lead to higher cumulative expenses.
Conclusion
Mutual fund overlap is a subtle but important issue that can weaken your portfolio’s diversification and increase risk exposure. While investing in multiple schemes may appear prudent, if these funds hold similar underlying stocks or sectors, the benefit of diversification is significantly reduced. To maintain a well balanced portfolio, it’s essential to review your fund holdings regularly, choose schemes with distinct strategies, and remain mindful of the tax and cost implications involved in rebalancing.
A well diversified investment strategy begins with a clear understanding of equity fund basics including how different funds are structured, what assets they hold, and how they align with your financial goals. With thoughtful selection and periodic monitoring, investors can minimize unnecessary duplication, manage risks more effectively, and keep their mutual fund portfolio aligned with long term objectives and risk tolerance.
Frequently Asked Questions
1. What is mutual fund overlap?
It refers to having the same stocks or sectors across multiple mutual funds in your portfolio.
2. Why is high overlap bad?
It reduces true diversification and concentrates your risk exposure.
3. How can I check overlap between funds?
You can check for mutual fund overlap by reviewing the top holdings and sector allocation of each scheme, which are available in the fund factsheets and portfolio disclosures provided by the Asset Management Companies (AMCs).
4. Should I sell overlapping funds immediately?
Not always. Consider tax impact, performance, and exit loads before taking action.
5. Does overlap matter in SIPs?
Yes, especially when SIPs are spread across funds of similar strategies.
6. Can debt funds overlap too?
Yes, particularly in corporate bond funds with similar issuer holdings.
Disclaimers
Investors may consult their Financial Advisors and/or Tax advisors before making any investment decision. This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Asset Management Company or its employees. The company makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Company, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action. These materials are not intended for distribution to or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation. The distribution of this document in certain jurisdictions may be restricted or totally prohibited and accordingly, persons who come into possession of this document are required to inform themselves about, and to observe, any such restrictions.
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