India’s equity markets are soaring to record highs, drawing many new investors driven by the fear of missing out (FOMO). Equity Mutual Funds folios have surged by 13.50%, reaching 15.42 crore compared to 13.64 crore last year. While investing in mutual funds can help you achieve financial goals and build wealth, avoiding portfolio overlap is crucial to ensure proper diversification and minimise risks.
What is Portfolio Overlap?
Portfolio overlap occurs when the same securities are held across multiple mutual fund schemes. While diversification aims to spread risk by investing in different sectors, excessive overlap concentrates risks and diminishes the benefits of diversification.
For instance, if an investor holds multiple large-cap funds, the chances are high that these funds invest in the same top 100 securities by market capitalisation, reducing diversification.
Mutual Fund Portfolio Overlap
In mutual fund investments, portfolio overlap can occur due to:
- Similar Categories: Funds within the same category (e.g., large-cap or mid-cap) often share securities.
- Weighting: Even if the securities differ, similar weighting patterns across funds can create redundancy.
Impacts of Overlap:
- Increased concentration risk.
- Diminished potential returns due to reduced diversification.
- Complex portfolio management without adding real value.
Adding a new mutual fund scheme should only be considered if it brings a unique investment style or strategy to your portfolio. Avoid adding funds solely due to past performance or enticing “New Fund Offers” (NFOs).
How to Avoid Portfolio Overlap?
- Use Online Tools
Various portfolio overlap tools allow you to:
- Compare mutual funds within the same category or subcategory.
- Identify common stocks and the percentage of overlap between two or more funds.
- Highlight unique stocks in each fund.
- Limit Schemes Per Category
- Hold up to two schemes within the same category.
- Large-cap funds often have 50–70% overlap.
- Flexi-cap funds typically overlap by 40–60%.
- Mid-cap funds may overlap by 30–50%, and small-cap funds by 20–30%.
- Remove Underperforming Schemes
- Eliminate funds consistently underperforming relative to their benchmarks or category averages.
- Remove schemes that add unnecessary risk or fail to align with your financial goals.
- Diversify Fund Managers
- Limit exposure to schemes managed by the same fund manager or fund house to avoid similar strategies being applied across multiple funds.
- Seek Professional Guidance
- Consult a SEBI-registered advisor for expert insights on recognising portfolio overlap and optimising your investments.
Factors to Consider When Managing Portfolio Overlap
- Market Capitalisation: Exposure to large-cap, mid-cap, and small-cap segments.
- Sector Allocation: Diversify across sectors to mitigate industry-specific risks.
- Fund Strategies: Evaluate fund managers’ investment styles and approaches.
- Asset Management Companies (AMC): Avoid over-reliance on a single AMC.
- Risk and Returns: Assess performance across different market phases.
- Liquidity: Ensure sufficient liquidity in your portfolio to meet financial goals.
The Benefits of Reviewing Your Portfolio
- Aligns investments with risk tolerance and financial goals.
- Facilitates cash flow adjustments for better financial planning.
- Optimises asset allocation to balance risk and return.
- Simplifies portfolio management by consolidating excess schemes.
- Replaces underperforming funds with better alternatives.
- Improves diversification across asset classes.
- Enhances portfolio returns while managing risk.
- Maintains portfolio liquidity for unforeseen needs.
- Ensures consistent wealth creation.
- Provides a clear path to achieving long-term financial goals.
Ten Benefits of Reviewing Your Portfolio Scientifically
A systematic review ensures:
- Investments remain aligned with your risk profile, goals, and time horizon.
- Asset allocation stays within optimal limits.
- Portfolio rebalancing is effective, reducing redundancies.
- Diversification is improved, enhancing returns and minimising risks.
- Optimising your investment strategy, and wealth management services can provide invaluable support in maintaining your portfolio.
Conclusion
Understanding and managing mutual fund portfolio overlap is essential for optimising your investment strategy. While mutual funds are excellent tools for diversification, excessive overlap can undermine this benefit, exposing your portfolio to unnecessary risks.
Key Actions to Avoid Portfolio Overlap:
- Regularly review your holdings using online tools.
- Limit the number of schemes within a category.
- Remove underperforming or redundant funds.
- Seek professional advice for portfolio optimisation.
By maintaining a well-diversified portfolio aligned with your financial goals and risk tolerance, you can achieve long-term success. Remember, quality outweighs quantity when it comes to investing. Proactively managing overlap ensures that your investments remain effective and resilient in an ever-changing market.
Frequently Asked Questions
1. What is mutual fund portfolio overlap?
Portfolio overlap occurs when multiple mutual funds hold the same securities, reducing diversification and increasing risk.
2. Why is avoiding portfolio overlap important?
Avoiding overlap ensures true diversification, minimising risks and maximising returns.
3. How can I identify portfolio overlap?
Use online tools to compare fund holdings and identify shared securities.
4. What role do SEBI-registered advisors play?
Advisors provide
- expert guidance on recognising overlap,
- optimising fund selection and
- aligning investments with your goals.
5. How often should I review my portfolio?
Conduct portfolio reviews periodically or whenever you make significant investment changes.