Is Your Mutual Fund Portfolio Overlapping? Here’s How to Find Out
However, many investors unknowingly dilute the benefits of diversification by holding multiple funds that invest in the same securities. This overlap can increase risk, duplicate costs, and ultimately diminish portfolio performance.
Wondering if your mutual funds are overlapping?
What is Mutual Fund Portfolio Overlap?
Portfolio overlap occurs when two or more mutual funds in your portfolio invest in the same underlying stocks.
This phenomenon is common because a large proportion of mutual fund assets are concentrated in the top 100 stocks, with fund managers often gravitating toward the same high-performing companies.
Why is Overlap a Problem?
Excessive overlap in your mutual fund portfolio can undermine the core benefit of diversification. Instead of spreading risk across different asset classes and sectors, overlapping holdings lead to concentrated exposure, making your portfolio vulnerable to market volatility.
Here’s why overlap should concern you:
Reduced Diversification: Overlapping stocks concentrate your portfolio, reducing the diversification that is crucial for risk mitigation.
Higher Costs: Paying management fees for multiple funds holding similar stocks means you’re incurring redundant expenses without gaining additional diversification benefits.
Increased Risk: A downturn in a few overlapping stocks can severely impact multiple funds, amplifying losses across your portfolio.
Industry Insights on Overlapping Risks
ELSS (Equity Linked Savings Schemes): Overlap ranges from 30% to as high as 80%.
Flexi-Cap Funds: Average overlap is about 25%, with some surpassing 50%.
Such high concentration levels expose investors to undue risk and volatility.
How to Identify Mutual Fund Overlap
Tracking overlapping securities across multiple mutual funds can be complex without the right tools.
Introducing 1 Finance’s Mutual Fund Overlap Calculator
Our Mutual Fund Overlap Calculator provides an intuitive way to detect overlapping stocks between mutual funds. This tool helps investors streamline their portfolios, reduce risk, and avoid redundant costs.
Key Features:
Compare up to Five Schemes: Analyse overlap across five mutual funds simultaneously.
Top 5 Stock Exposure: Instantly view the top 5 common stocks and their weightages.
How It Works
Visit: 1 Finance Mutual Fund Portfolio Review Tool.
Input Funds: Add the mutual funds you wish to analyse, e.g.,
HDFC Top 100 Fund
Axis Blue chip Fund
UTI Large & Mid Cap Fund
ICICI Prudential Blue chip Fund
Analyse: Click the “Find Overlap” button to generate an overlap report.
The tool provides a detailed percentage overlap between funds. For example, HDFC Top 100 Fund and ICICI Prudential Blue chip Fund may have a 57% overlap, highlighting significant redundancy.
Consequences of Overlapping Portfolios
High overlap can have several negative impacts:
Reduced Diversification: Limits the risk-reducing benefit that diversified investments typically provide.
Risk Concentration: Poor performance of overlapping stocks can negatively affect multiple funds.
Redundant Costs: Paying multiple sets of management fees without proportional diversification benefits.
Disrupted Portfolio Strategy: Inconsistent with goals for balanced and well-spread investments.
How Our Overlap Tool Enhances Your Portfolio Strategy
Managing a diverse yet efficient mutual fund portfolio is crucial. Our Mutual Fund Overlap Calculator simplifies this by delivering clear, actionable insights.
Benefits of the Mutual Fund Overlap Calculator:
Cost Efficiency: Minimize overlapping investments and associated fees.
Risk Reduction: Identify areas where portfolio concentration is too high.
Time-Saving: Automates the complex process of comparing fund portfolios.
Informed Decision-Making: Helps construct a truly diversified portfolio tailored to your risk profile.
Considerations
While the tool is extremely helpful, keep in mind:
Not a Substitute for Professional Advice: Consult a financial advisor for personalized investment strategies.
Market Conditions Vary: Reassess overlaps periodically, as fund holdings evolve over time.
Focus Primarily on Equities: Additional due diligence may be required for non-equity mutual funds.
Final Thoughts
A well-constructed mutual fund portfolio should balance risk and reward. Overlapping funds can compromise this balance, exposing you to unnecessary risks and costs. Using an advanced Mutual Fund Overlap Calculator can help you fine-tune your investments, ensuring you maintain true diversification and optimize portfolio performance.
Don’t let overlap drag down your returns — analyse and optimize your mutual fund portfolio today!
Disclaimer: The views expressed in this article are solely those of the author and are intended for educational purposes only. This content does not constitute financial advice or a recommendation for any financial product.