Inflows into mutual funds surged 81% year-on-year (YoY) in July 2025, to over Rs 427 billion (bn).
Many individual investors (retail and HNIs) are shunning bank fixed deposits for mutual funds in the endeavour to earn better returns.
A majority (over 85%) are choosing high-risk equity-oriented mutual funds, and most of them have an over-diversified portfolio.
Investors have kept buying mutual fund schemes – a new fund offer, or an existing scheme that is topping on historical returns, or certain schemes just because their friend/relative/colleague/next-door neighbour recommended it, etc.
However, the risk in this ad hoc approach is that you may end up with overlapping mutual funds that potentially dilute your portfolio returns.
Overlapping Mutual Funds
Overlapping mutual funds is a situation where you invest in schemes with similar investment mandates or characteristics, and their underlying portfolios may have an overlap with the other schemes in your portfolio.
You see, the overlap may not be limited to securities or stocks held, but also in terms of their weight in the scheme’s portfolio and sector composition.
Portfolio overlap mainly happens when there is an overexposure of schemes to certain stocks and sectors, making it vulnerable to risks, particularly in volatile markets and economic downswings.
So, what overlap refers to is a situation of duplication of securities in the portfolio.
For example, if you hold multiple schemes within the same category — say, large cap funds — it is likely that they have invested in the same stocks. This is because, by definition, these funds are mandated to invest in the first 100 companies by market capitalisation.
In such a case, you need to assess whether the portfolio of large cap funds in your portfolio is unique; otherwise, it may not add much value.
Hence, you need to be conscious about how much the portfolios overlap. If it is too high, it means that the concentration risk is high, and it may impact returns.
How to Check Portfolio Overlap
Well, in this day and age, you have online portfolio overlap screeners or tools. All you need to do is enter two or more scheme names from the respective category and subcategories to check.
The online portfolio overlap tool can help you check the proportion of stocks or securities common in the two schemes you are comparing, their weight in one scheme compared to the other, the uncommon stocks, and more.
Be mindful not to compare apples with oranges. For example, do not compare a large cap fund with a small cap fund. Since they have different investment mandates, the portfolio overlap would be low or nil. A sensible comparison shall help you interpret the data meaningfully.
Also, keep in mind that mutual funds keep churning their portfolio, and hence, portfolio overlap must be looked at as a dynamic concept. You can’t check once and forget. Checking the overlap biannually or annually needs to be considered.
If the underlying portfolio overlap is high (over 60-55%) and if you are already holding such schemes, a suitable portfolio action may be warranted.
What to Do in Case of High Portfolio Overlap
Portfolio optimisation is what you need to pay attention to.
You may consider the following:
- When you own multiple schemes from the same category and sub-category, remove the ones that have consistently underperformed their category average returns and benchmark index over the long term.
- Reduce the number of schemes from the same fund house/fund manager as they are likely to follow similar investment styles/strategies across schemes.
- Exit schemes that do not match your current risk profile, broader investment objectives, and time horizon, and instead are increasing risk.
- Hold not more than 1-2 from the respective category and subcategory, and ensure they follow distinct investment strategies.
- Trim down the overall size of the overall mutual fund portfolio to 10-15 schemes.
When doing the above, carefully evaluate your AMC-wise exposure, allocation to the categories and subcategories of mutual funds, market capitalisation exposure, sector exposure, the returns of the scheme (across time periods – bull and bear markets), and the level of risk you have been exposed to.
Keep in mind that a portfolio clean-up exercise also needs to consider the market scenario.
For example, at present, when the midcaps and smallcaps seem overvalued, reducing the allocation to mid cap funds and small cap funds if your risk appetite is not high and you do not have an investment horizon of 7-8 years or more, may be considered.
This shall help keep the downside risk in check. Instead, you may consider some of the best large cap funds, dividend yield funds, value funds, and/or flexi cap funds as a part of your core mutual fund portfolio.
For tactical allocation across asset classes, you may also consider some multi-asset allocation funds.
In addition, you need to be mindful of the capital gain tax implication and exit load during the portfolio cleanup exercise.
Benefits of Checking Portfolio Overlap and Review
Reviewing your mutual fund portfolio for overlap and other aspects has the following benefits:
- Resets the asset allocation within the limits best suited for you
- Results in portfolio consolidation and rebalancing
- Restructures the portfolio by replacing underperforming assets with better alternatives
- Resets portfolio diversification to the optimal in line with your risk profile, investment objective, envisioned financial goals, and the time in hand to achieve those goals
- Ensure the portfolio is in line with the desired asset allocation
- Potentially improves risk-adjusted returns
- Ensure liquidity of the portfolio
- Makes sure the portfolio builds wealth and is on the path to achieve the envisioned financial goals.
Conclusion
As an investor, wilfully assess whether you are holding overlapping mutual funds in your portfolio, and if it’s exceptionally high, take measures to address it.
If you are unsure how to go about and what to do, consider seeking the services of a SEBI-registered investment advisor, who shall unbiasedly review your portfolio and accordingly, recommend actions to take.
Invest sensibly, be thoughtful in your approach.
Happy investing.
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