Overlapping Mutual Funds: Why It Happens and How to Fix It?

When you start investing in mutual funds, the goal is usually clear: diversification. Spread your risk, tap into various sectors, and maximise your returns. But what if we told you that having multiple funds doesn’t always equal diversification?

Enter portfolio overlap—a sneaky phenomenon that can derail your financial strategy. Imagine investing in multiple mutual funds, only to find they hold the same stocks or focus on similar sectors. The result? You’re not diversifying; you’re doubling down.

This guide will explore portfolio overlap, its impact, and how to manage it effectively.

What Exactly Is Portfolio Overlap?

Let’s break it down. Portfolio overlap happens when two or more mutual funds in your portfolio share significant common holdings. Here’s an example:

Suppose you invest in Fund A and Fund B. Both claim to offer diversification, but their holdings show they both heavily favour large-cap tech stocks. Instead of reducing your risk, you’ve concentrated it in one sector.

Here’s why excessive overlap is a red flag:

• It limits diversification: Your investments are clustered in a few sectors or stocks.
• It increases risk: A downturn in those sectors or stocks can hit your portfolio harder.
• It adds redundancy: You’re paying fees for multiple funds doing the same thing.

While a bit of overlap is natural, too much can hurt your portfolio’s efficiency.

Why Does Portfolio Overlap Happen?

If you’ve encountered overlap in your investments, you’re not alone. It’s a common issue, often stemming from these factors:

1. Popular Stocks: Some stocks are like celebrities—everyone wants them in their portfolio. Blue-chip companies, for instance, are staples in many mutual funds because they’re considered safe bets. The problem? If every fund you own has the same stars, you’re unintentionally concentrating your risk.
2. Chasing Top Performers: It’s tempting to pick funds with stellar past performance. But here’s the catch: top-rated funds often have similar investment strategies, leading to overlap.
3. Market Trends: Fund managers flock to them when specific sectors (like tech or pharma) are booming. While it makes sense from a returns perspective, it increases the chances of overlap in your portfolio.
4. Lack of Research: Let’s face it—most don’t dig deep into a fund’s holdings before investing. Without thorough research, it’s easy to end up with funds that mirror each other.

How to Spot Portfolio Overlap

Do you have overlap issues? Here’s how you can identify it:

1. Compare Fund Holdings: Start with the basics. Most mutual funds disclose their top holdings. Scrutinise each fund’s top 10 or 20 holdings in your portfolio and see if the same names pop up.
2. Use Portfolio Analysis Tools: Why do all the hard work when tech can help? Tools can clearly show overlap. These platforms analyse your holdings and highlight areas of duplication.
3. Check Sector Allocation: Sometimes, the overlap isn’t about individual stocks but sectors. For instance, two funds might appear different, but both have heavy exposure to the tech sector.
4. Understand Fund Styles: Is your portfolio complete with growth funds? Or value funds? Funds with similar investment styles are more likely to overlap. Diversifying fund styles can reduce this risk.
5. Leverage Professional Reports: Financial advisors and fund platforms often provide detailed fund holdings and performance reports, which can offer valuable insights into portfolio overlap.

Why Overlap Is a Problem:

At first glance, overlap is not a big deal. But dig a little deeper, and you’ll see how it can derail your financial strategy:

1. Higher Risk: Overlapping funds concentrate your investments in specific stocks or sectors. If that sector takes a hit, your portfolio could suffer significant losses.
2. Fake Diversification: On paper, your portfolio might look diversified. But if your funds hold the same assets, you’re not spreading risk as effectively as you think.
3. Higher Costs: Why pay fees for multiple funds that essentially give you the same exposure? Managing overlap can save you money in the long run.
4. Misaligned Goals: Too much overlap can push your portfolio away from your original investment goals. For example, if you aim for stability, overlap in high-risk sectors could introduce more volatility.

How to Manage and Avoid Overlap?

Ready to clean up your portfolio? Here’s how you can manage overlap effectively:

1. Diversify Fund Categories: Choose funds from different categories—equity, debt, hybrid, etc. Within equity, diversify further into large-cap, mid-cap, and small-cap funds.
2. Pick Complementary Strategies: Instead of picking funds with similar approaches, look for complementary strategies. For example, pair a growth-focused fund with a value-focused one.
3. Limit the Number of Funds: More isn’t always better. Owning too many funds increases the chances of overlap. Focus on a few well-researched funds that align with your goals.
4. Review and Rebalance Regularly: Your portfolio isn’t a “set it and forget it” deal. Conduct periodic reviews to identify and address overlap. Rebalancing your portfolio can help maintain diversification.
5. Consult a Financial Advisor: If managing overlap feels overwhelming, expert advice can be a game-changer. That’s where Fintoo comes in.

Fintoo offers personalised financial advisory services tailored to your unique needs and goals. Using advanced portfolio analysis tools, Fintoo advisors can:

• Analyse Overlap: Identify overlapping investments in your portfolio to optimise diversification.
• Curate a Balanced Strategy: Recommend complementary funds that align with your financial objectives while reducing redundancy.
• Simplify Decision-Making: Provide easy-to-understand insights and actionable steps, removing the guesswork from portfolio management.
• Ongoing Support: Ensure your portfolio stays updated with market trends and your evolving goals through periodic reviews.

By leveraging Fintoo’s expertise, you can rest assured that your investments work efficiently toward your financial aspirations. 

When Overlap Isn’t a Bad Thing

Believe it or not, some overlap can be beneficial. Here’s when it’s okay:

• Risk Mitigation: A bit of overlap between equity and balanced funds can stabilise your portfolio during market volatility.
• Reinforcing Strong Performers: If overlapping stocks are consistent winners, they can boost your returns.
• Ease of Transition: Overlapping funds can make it easier to shift between investments without disrupting your strategy.

Tips for a Balanced Portfolio

Managing overlap is just one piece of the puzzle. Here are some additional tips to keep your portfolio balanced:

• Set Clear Objectives: Define your investment goals, risk tolerance, and time horizon. These factors should guide your fund selection process.
• Think Globally: Explore funds that invest in international markets to reduce reliance on domestic economic conditions.
• Watch Expense Ratios: Funds with high expense ratios can reduce your returns. Be aware of costs.
• Stay Informed: Keep track of market trends and fund performance to make timely adjustments.

Final Thoughts

Portfolio overlap might not grab headlines, but it can quietly undermine your financial goals. The good news? It’s entirely manageable.

You can ensure your portfolio stays on track by identifying overlap, diversifying intentionally, and staying proactive with regular reviews. And remember, investing is a marathon, not a sprint. Making informed decisions today sets the foundation for a stronger financial future.

So, take a closer look at your mutual funds, tweak where necessary, and watch your portfolio grow brighter—not just more significant. Don’t let overlap hold you back—let Fintoo help you build a portfolio you can trust! Schedule a consultation with us today!

About the Author: Akash Chauhan , a seasoned Private Wealth Manager at Fintoo, a leading wealth and fintech company, specializes in catering to High Net Worth Individuals (HNI) and Ultra High Net Worth Individuals (UHNI). He is dedicated to providing tailored solutions in wealth management, financial planning, tax optimization, and retirement planning.