Buying multiple does not necessarily mean a portfolio is well diversified. An investor may hold three, four or even more equity schemes from different fund houses, yet find that many of them own the same companies. This duplication is known as portfolio overlap.
For instance, an investor holding two large-cap funds may find that both have substantial allocations to the same banking, IT or pharmaceutical stocks. While the schemes are different, their underlying portfolios may be quite similar, resulting in greater concentration than the investor may realise.
Debasish Mohanty, managing director and chief strategy officer at The Wealth Company Mutual Fund, said portfolio overlap is particularly relevant for investors holding multiple schemes with the objective of diversifying across stocks, sectors, market capitalisation or investment styles.
What is portfolio overlap and why does it matter?
Portfolio overlap refers to the extent to which two or more mutual funds hold the same securities. However, investors should not simply count the number of common stocks, Mohanty said. They should also examine how much of each fund’s portfolio is invested in those common holdings.
For example, two schemes may hold the same company, but if it accounts for only a small portion of one fund’s portfolio, the overlap may have limited significance. On the other hand, substantial exposure to the same companies across several schemes can reduce the diversification an investor expects from holding multiple funds.
Sectoral exposure also needs to be considered. If several funds are heavily invested in the same sectors, such as banking, IT or pharmaceuticals, investors could end up with a concentrated portfolio, Mohanty said.
Market capitalisation is another factor. Multiple funds investing predominantly in large-cap, mid-cap or small-cap companies can lead to redundant exposure, particularly when the funds follow similar investment approaches.
How can investors identify overlap across mutual funds?
Mohanty said retail investors can start by comparing the top holdings of their mutual funds. These are generally disclosed in the monthly or quarterly factsheets of schemes, which are available on the respective asset management companies’ websites. Investors can also find portfolio information on financial platforms such as Morningstar and Value Research.
Investors should compare the common holdings as well as their respective portfolio weights. They should also examine whether the schemes have similar sectoral and market-cap exposure.
The style of a fund can provide another indication of potential overlap. Mohanty said funds following similar growth, value or blend strategies may end up selecting similar stocks.
Investors can also look at active share, which measures how much a fund’s portfolio differs from its benchmark. Mohanty said a low active share indicates greater similarity with the benchmark and can potentially result in greater overlap with other funds tracking the same index.
Portfolio-overlap calculators available on financial websites and mutual fund investment platforms can also help. Mohanty said these tools calculate the percentage of common holdings between selected schemes, making it easier for retail investors to identify duplication.
How much portfolio overlap is too much?
There is no universal threshold for what constitutes significant portfolio overlap, Mohanty said. The appropriate level depends on the fund category and the investor’s objective.
For index funds and ETFs, high overlap can be expected. Funds tracking the same index, such as the Nifty 50, can have overlap close to 100% because they are designed to hold substantially the same securities. Such overlap, therefore, is not necessarily a concern.
For actively managed funds, the interpretation is different. Mohanty said an overlap of around 20–30% between large-cap funds may be acceptable. However, if two mid-cap or small-cap funds share 40% or more of their top holdings, the diversification benefit is likely to diminish.
Ultimately, Mohanty said investors should assess overlap in the context of their overall portfolio . If combined exposure to a particular stock or sector exceeds an investor’s risk tolerance, or if the overlap reduces the intended diversification, it may be prudent to consolidate or rebalance the portfolio.
Regular reviews are also important. Mohanty recommends reviewing the portfolio at least once a year, since the holdings and exposure of actively managed funds can change over time.