In today’s dynamic investment world, mutual funds are considered one of the most effective tools for wealth creation. They offer diversification, professional management, and flexibility for investors of all profiles. However, one crucial aspect that many investors overlook is Mutual Fund Overlap.
This blog by Garg Financial Services (GFS Wealth) will explain Mutual Fund Overlap in simple terms, its associated risks, how to identify it, and ways to avoid it, helping you make smarter, more efficient investment decisions.
What is Mutual Fund Overlap?
Mutual Fund Overlap occurs when two or more mutual funds in your portfolio invest in the same stocks or securities. This results in redundancy and reduces the actual diversification benefits that mutual funds are supposed to provide.
For instance, if Fund A and Fund B both have Reliance Industries, HDFC Bank, and Infosys as their top holdings, owning both funds might not add much value to your portfolio. Instead, it may lead to concentration risk, where your investments are heavily reliant on the performance of a few stocks.
Why Do Mutual Fund Overlaps Happen?
Several reasons contribute to Mutual Fund Overlap:
1. Similar Fund Objectives
Funds with the same category (e.g., large-cap or flexi-cap) tend to follow the same benchmarks and invest in similar companies.
2. Popular Stocks
Certain high-performing stocks are common favorites among fund managers, leading to multiple funds investing in them.
3. Lack of Portfolio Review
Investors often add new mutual funds without reviewing existing holdings, resulting in overlapping assets.
4. Poor Asset Allocation Strategy
Investors may chase returns and invest in funds that performed well recently, without analyzing their holdings.
Risks of Mutual Fund Overlap
Understanding the risks associated with Mutual Fund Overlap is essential to ensure your portfolio remains balanced and efficient. Let’s look at some of the significant risks:
1. Reduced Diversification
The main advantage of mutual funds is diversification. However, overlapping funds diminish this benefit as your exposure to different companies becomes limited.
2. Concentration Risk
Overlapping stocks concentrate your investment in a few companies. If these companies underperform or face market volatility, your overall portfolio is at greater risk.
3. Inefficient Portfolio
When multiple funds hold similar stocks, you’re paying more in expense ratios without gaining additional benefits. It leads to an inefficient portfolio and reduced returns.
4. Tax Complications
Overlapping funds might trigger short-term capital gains if rebalanced frequently, adding to your tax liability.
5. Confusion in Performance Analysis
Too many similar funds make it harder to analyze which fund is actually contributing to your returns and which isn’t.
How to Identify Mutual Fund Overlap
To manage your portfolio better, it’s crucial to identify Mutual Fund Overlap. Here’s how:
1. Analyze Fund Holdings
Manually review the top holdings of each mutual fund in your portfolio. Look for repetition of stocks.
2. Use Online Tools
Various platforms offer Mutual Fund Overlap analysis tools where you can input the names of two or more funds and view the percentage of overlap.
3. Check Sector Allocation
Sometimes, the stocks may differ but belong to the same sector. This too can lead to sectoral concentration and should be reviewed.
4. Consult a Financial Advisor
Experts like GFS Wealth can help analyze your investments and recommend the best way to optimize your mutual fund portfolio.
How Much Overlap is Too Much?
There is no fixed rule, but ideally, Mutual Fund Overlap should be minimal — preferably under 30%. A 50% or higher overlap indicates poor diversification and should be corrected.
Overlapping is more common in categories like:
- Large-cap funds
- Flexi-cap funds
- ELSS (Tax-saving) funds
Diversification should happen across fund categories and investment styles, not just fund names.
How to Avoid Mutual Fund Overlap
Here are some strategies to avoid or reduce Mutual Fund Overlap in your portfolio:
1. Diversify Fund Categories
Invest in different fund types — large-cap, mid-cap, small-cap, multi-cap, debt, hybrid, etc. This automatically reduces overlap.
2. Limit the Number of Funds
Too many mutual funds create clutter and overlap. Stick to 4–6 well-performing funds from different categories.
3. Use Portfolio Review Tools
Use tools provided by platforms like GFS Wealth to periodically analyze your holdings for overlap and make adjustments.
4. Invest with a Goal-Based Approach
Align your mutual fund investments with specific financial goals. This keeps your investment strategy focused and avoids unnecessary fund additions.
5. Choose Fund Managers with Different Styles
Some fund managers follow value investing, while others follow growth investing. Choosing different styles leads to varied stock selection and less overlap.
Examples of Mutual Fund Overlap
Let’s understand with a simple example:
- Fund A (Large-cap) top holdings: Reliance, Infosys, HDFC Bank, TCS, ICICI Bank
- Fund B (Flexi-cap) top holdings: Reliance, HDFC Bank, ICICI Bank, Infosys, Axis Bank
Here, you already see 4 out of 5 stocks overlapping. This means 80% of these two funds are essentially invested in the same companies.
Hence, you are not achieving the intended diversification.
Mutual Fund Overlap: Case Study
Investor Profile: Mr. Sharma, Age 40, Invested in:
- Fund 1: SBI Bluechip Fund
- Fund 2: ICICI Prudential Bluechip Fund
- Fund 3: Mirae Asset Large Cap Fund
After using a Mutual Fund Overlap tool, it was found that:
- 65% holdings were overlapping
- 3 funds held the same top 10 stocks
- Expense ratios and fund management fees were paid multiple times
Solution:
- Retained one bluechip fund
- Replaced other funds with a mid-cap and hybrid fund for better diversification
Result:
- Reduced overlap to 20%
- Improved portfolio efficiency
- Better returns with lower volatility
Role of Financial Advisors in Managing Mutual Fund Overlap
Professional financial advisors like Garg Financial Services (GFS Wealth) play a vital role in helping investors:
- Identify overlapping funds
- Suggest fund rebalancing
- Create a diversified and goal-oriented portfolio
- Monitor performance periodically
- Provide personalized investment strategies
Their guidance ensures that your hard-earned money is allocated optimally without duplication.
Final Thoughts
Mutual Fund Overlap is a silent portfolio killer. It erodes the very purpose of investing in multiple mutual funds — diversification.
Whether you’re a new investor or a seasoned one, make it a habit to:
- Review your mutual fund holdings regularly
- Use tools and expert guidance to avoid duplication
- Keep your investment strategy aligned with your financial goals
At Garg Financial Services (GFS Wealth), we help you build a smart, diversified, and efficient mutual fund portfolio — free from overlap and full of potential.
Frequently Asked Questions (FAQs)
1. Is Mutual Fund Overlap always bad?
Not necessarily. A small degree of overlap is normal. However, a high percentage of overlapping holdings reduces diversification and increases risk.
2. How do I check for Mutual Fund Overlap?
You can manually check top fund holdings or use tools provided by investment platforms or consult experts like GFS Wealth.
3. Can I keep funds with overlap if they perform well?
While returns matter, relying on the same stocks across funds is risky. Diversification is key to long-term success.
4. How often should I review my portfolio?
You should review your portfolio at least twice a year or after any major financial change.
Ready to Optimize Your Portfolio?
Let Garg Financial Services (GFS Wealth) help you analyze your investments, identify Mutual Fund Overlap, and guide you to build a balanced and diversified portfolio.
Contact us today and take the first step toward smarter investing!
