Have multiple mutual funds? Know how to measure portfolio overlap and when it can be bad

If you own three or four mutual funds, you may feel well-diversified. But look closely, and you may find they all hold the same top 10 in almost the same proportions. This is called portfolio overlap. You think you are spreading risk across multiple funds. In reality, you are making the same bet several times over.

What is overlap?

Overlap is the degree to which two or more mutual funds in a portfolio hold the same underlying stocks. If fund A and fund B both hold a major weight of stock A, that stock is contributing to your portfolio twice. The higher the overlap, the less true diversification you have.

Why it happens?

Overlap happens because many funds fish in the same pond. Indian large-cap funds, for instance, are all benchmarked to the Nifty 50 or similar indices. The universe of liquid, investable large-cap stocks is not that large. Fund managers running different funds end up with similar convictions on the same dominant companies.


Calculate your real exposure

Two funds. One common stock. What do you actually own?

Measuring the overlap

The simplest way to measure overlap between two distinct mutual funds is to list the stocks in each, assign portfolio weights, and calculate what percentage of holdings are common. A 30-35% overlap is fairly common. Above 50% starts to be a concern. Above 70%, the two funds are essentially mirror images of each other and holding both adds little value.

When it’s a problem?

Overlap becomes a real cause of concern when the common stocks go through a rough patch. If four of your mutual funds all own that one stock that falls 30%, that loss hits your portfolio four times—once through each mutual fund. You feel the damage much more than you would have if your funds had genuinely different holdings. Overlap also means that you are paying multiple sets of expense ratios for exposure you could have got from a single fund.

Check your portfolio

Before adding a new fund, check its top 10-15 holdings against what you already own. If the new fund’s top holdings look identical to your existing ones, it is not adding much. Pay attention when combining funds within the same category -- two flexi-cap funds or two large-and-midcap funds from different fund houses often overlap heavily. Also watch for overlap across categories.

Not always bad

Some overlap is inevitable and not worth losing sleep over. If you hold an index fund and a large-cap active fund, they will share many stocks -- that is expected. What matters is whether the funds together achieve different objectives. An active mid-cap fund and a large-cap index fund can co-exist comfortably even if they share a handful of names, because their core exposure is different. The goal is not zero overlap -- it is meaningful diversification.