Investors choose mutual funds to build diversification, reduce risk, and aim for better returns. But in reality, many portfolios end up holding the same stocks through multiple schemes. This important issue is known as mutual fund overlap, and it can silently reduce diversification and increase risk without investors realizing it.
In this complete expert-backed guide, we’ll explore what mutual fund overlap means, its risks, how to check it, safe limits, and the best strategies to avoid portfolio duplication. This guide is written with financial accuracy and insights used by top platforms like ET Money, Moneycontrol, Groww, Morningstar, and Value Research.
What is Mutual Fund Overlap?
Mutual fund overlap refers to a situation where two or more mutual funds in an investor’s portfolio hold the same stocks. This leads to duplication, which means although you have invested in separate funds, your portfolio is not as diversified as you think.
Simple Definition
Mutual fund overlap occurs when multiple funds own the same stocks, reducing diversification and increasing overall risk.
Technical Definition
Fund overlap is the percentage duplication of securities between two or more mutual fund schemes based on their portfolio weightage and stock allocation similarity. This is also referred to as portfolio overlap or mutual fund portfolio duplication.
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How Does Fund Overlap Happen?
Mutual fund overlap can occur across different fund categories, especially in equity-oriented funds. Let’s understand how:
1. Equity Funds (Similar Strategies)
Even if fund names differ, their investment philosophy can be similar.
Example:
Two large-cap funds both invest in 80–90% of Nifty 50 stocks. Most large-cap funds are required by SEBI to invest heavily in the same market cap universe, leading to duplication.
2. Index Funds & ETFs
Index funds replicate an index like Nifty 50, Sensex, Nifty Next 50, etc. Holding multiple index funds that track the same benchmark guarantees high overlap.
Example:
- Investing in two Nifty 50 Index Funds = 100% overlap
3. Multi-Cap & Flexi-Cap Overlap
These categories can invest across large, mid, and small caps. Many funds end up buying similar performing stocks within top sectors like financials, IT, and FMCG.
4. Sectoral & Thematic Funds
Since they focus on one sector, duplication is natural.
Example:
Two pharma funds will definitely overlap in companies like:
- Sun Pharma
- Cipla
- Dr. Reddy’s
Why Mutual Fund Overlap Is a Big Problem?
Mutual fund overlap negatively impacts your investment performance and risk-return balance. Here’s why it matters:
1. Reduced Diversification
You may think you own multiple funds, but if they hold the same stocks, your risk isn’t spread across sectors or market caps.
2. Higher Portfolio Risk
If a common stock declines, your entire investment suffers multiple hits.
Example:
If 4 of your funds hold HDFC Bank, and it drops by 10%, your portfolio impact is multiplied.
3. Increased Portfolio Volatility
Duplication reduces the stability of returns because the same stock weight becomes disproportionately higher.
4. Duplicated Holdings = Waste of Effort
More funds do NOT mean more diversification. Without knowledge, investors end up increasing quantity, not quality.
Real-World Examples of Mutual Fund Overlap (With Tables)
Let’s consider a sample comparison of two popular large-cap funds. (Example data for explanation)
| Criteria | Fund A (Large-cap) | Fund B (Large-cap) |
|---|---|---|
| Top Holding | Reliance Industries | Reliance Industries |
| Allocation | 9% | 10% |
| Second Holding | HDFC Bank | HDFC Bank |
| Allocation | 8% | 9% |
| Total Overlap | 75% | 75% |
Overlapping Top Stocks
| Stock | Fund A Weight | Fund B Weight |
|---|---|---|
| Reliance Industries | 9% | 10% |
| HDFC Bank | 8% | 9% |
| ICICI Bank | 7% | 6% |
| Infosys | 6% | 5% |
Notice: 4 stocks dominate both funds, giving high overlap and limited diversification.
How to Check Mutual Fund Overlap (Best Tools)
Here are the best expert recommended tools to check mutual fund overlap:
| Tool | Features | Link Type |
|---|---|---|
| Morningstar | Professional-grade overlap calculator | Free + paid |
| ET Money | Easy visualization + portfolio tracking | Free |
| Value Research | Category analysis + overlap comparison | Free |
| RupeeVest | Advanced portfolio similarity analytics | Free + paid |
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How Much Mutual Fund Overlap Is Considered Safe?
Experts use a benchmark percentage to assess safe duplication:
| Overlap % | Meaning | Action |
|---|---|---|
| 0–20% | Low overlap | Safe |
| 20–40% | Moderate | Watch carefully |
| 40–60% | High | Consider corrective action |
| 60%+ | Very high | Exit / restructure |
Ideal Safe Limit:
Keep overall mutual fund overlap below 30–35%.
This ensures diversification across sectors, market caps, and investment strategies.
How to Reduce or Avoid Mutual Fund Overlap
1. Choose Funds from Different Categories
Avoid investing in multiple funds from the same category.
✔ Combine:
- Large Cap + Mid Cap + Small Cap
or - Large Cap + Flexi Cap + ELSS
2. Diversify Across Market Caps
Invest in funds targeting different segments:
- Large-cap (stability)
- Mid-cap (growth potential)
- Small-cap (high risk-high reward)
3. Sector Diversification
Do not overload with sectoral funds unless you understand them deeply.
4. Avoid Multiple Index Funds of Same Benchmark
Pick only one Nifty 50 or Sensex index fund.
Best Portfolio Strategy to Remove Overlap (Sample Portfolio)
Here’s a sample diversified portfolio with minimal duplication:
| Category | Example Allocation | Why? |
|---|---|---|
| Nifty 50 Index Fund | 40% | Strong stable core |
| Mid-Cap Fund | 30% | Growth opportunity |
| Small-Cap Fund | 20% | High return potential |
| ELSS (Tax Saving) | 10% | Tax + balanced exposure |
This structure creates diversification across risk levels, sectors, and market caps.
Pros & Cons of Having Mutual Fund Overlap
| Pros | Cons |
|---|---|
| Exposure to strong-performing stocks | Higher portfolio risk |
| Possible boosted returns in bull market | Significant loss in downturn |
| Familiarity with known companies | Reduced diversification |
| Easy comparison | Not suitable for long-term stability |
Common Myths About Fund Overlap
| Myth | Reality |
|---|---|
| More funds mean more diversification | More funds can mean more duplication |
| Same category funds offer variety | They likely invest in identical stocks |
| Overlap is always bad | Moderate overlap is acceptable |
| Index funds don’t overlap | Same-benchmark funds overlap 100% |
FAQs
1. What is mutual fund overlap?
Mutual fund overlap refers to multiple funds holding the same stocks, reducing true diversification.
2. How to check mutual fund overlap?
Use platforms like Morningstar, ET Money, Value Research, and RupeeVest to compare holdings.
3. Is overlap good or bad?
Moderate overlap may be fine, but high overlap reduces diversification and increases risk.
4. How much overlap is risky?
Anything above 40–60% is considered risky and should be reduced.
5. Which funds have high overlap?
Funds within the same category (Large-cap vs. Large-cap, Pharma vs. Pharma, etc.) tend to have high overlap.
Conclusion
Mutual fund overlap can damage your portfolio’s core objective—diversification. Too many investors unknowingly hold multiple funds with identical stocks, creating unnecessary risk. The ideal strategy is to:
- Limit overlap to 30–35%
- Choose varied categories
- Diversify across market caps
- Use tools to check duplication regularly
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