Most investors love to say, “I hold five mutual funds, so I’m diversified.”
Really? Pull up the factsheets, and you might find all five quietly loaded with the same 8 to 10 large-cap names: HDFC Bank, ICICI Bank, Reliance Industries, Infosys, SBI, and a few others.
On paper, your portfolio looks sophisticated. In reality, you’ve built a fragile tower of clones.
When there is a next market crash, banking shock, or sector slide, all those “different” funds tumble in sync. That’s not diversification. That’s concentration risk, wrapped in layers of paperwork you missed.
When common holdings become common pain
Consider a scenario where you own Long Term Equity Fund A, BlueChip Equity Fund B, and BlueChip Equity Fund C, all from different asset managers. You feel secure. Three fund houses, three fund managers, surely, you’re diversified, right?
Wrong, you have 3 funds all concentrated in large-cap financial services or banking stocks. Then the sector takes a hit. HDFC Bank is the top stock, and then there are others from the same sector down the list; all three of your funds will take it on the chin.
Suddenly, every fund in your portfolio shows a nearly identical directional drop in Net Asset Value (NAV). Your three-fund diversification collapses like a deck of cards.
That’s the contagion effect, when one bad stock infects your entire portfolio because it hides in multiple funds under different names.
Why it happens: Benchmark bias and herd behaviour
Most Indian equity funds, especially large-cap, flexi-cap, and multi-cap, are benchmarked to the Nifty 50 or BSE 100.
Here’s the issue: The composition of the top ten companies is entirely weighted towards the large-cap segment. Most active managers end up owning the same dominant stocks just to avoid tracking error. In technical parlance, this is called index-hugging. Here, the fund manager is trying to stay close to the index stocks and weightage to reduce the risk of underperformance vis-à-vis the index.
The result: funds across different AMCs, mandates, and even management styles quietly converge into near-identical portfolios. So, while your funds sound diversified, their guts are the same, the same top holdings, just reshuffled.
How to spot the overlap (and see what’s really going on)
If you’ve never checked overlap before, here’s what you can do. It’s surprisingly simple and eye-opening.
Step 1: Start with fund fact sheets
Every mutual fund publishes a monthly or quarterly factsheet listing its top 10 holdings and their weightages.
Let’s take a hypothetical example:
- Fund A: HDFC Bank (9.6%)
- Fund B: HDFC Bank (9.2%)
So, at least 9.2% of both funds are exposed to the same stock, HDFC Bank. That’s the first red flag.
Step 2: Use the Excel trick
If you want to go deeper (and you should), here’s how to calculate overlap manually.
Create a simple table like this:
| Stock | Fund A Weight | Fund B Weight | Minimum Weight (Overlap) |
| HDFC Bank | 9.6% | 8.5% | 8.5% |
| ICICI Bank | 7.8% | 6.0% | 6.0% |
| Reliance Industries | 5.0% | 4.0% | 4.0% |
| Infosys | 4.2% | 3.8% | 3.8% |
| Total Overlap | 22.3% |
Now sum the “Minimum Weight” column to get the total overlap between the two funds.
Formula:
Overlap (%) = Σ [min(weight in Fund A, weight in Fund B)]
That’s how you see, in cold math, that 22.3% of both funds are invested in the same companies.
To scale it up, open Excel and:
- List Fund A’s stocks in Column A, weights in Column B.
- Fund B’s stocks and weights in Columns C and D.
- Use =MIN(B2,D2) for each common stock.
- Sum the column to find the overlap percentage.
Or if you want to make your life easier, then use Online Overlap Tools.
If you prefer one-click analysis, several platforms automate this (and there could be others as well):
- Advisorkhoj Overlap Tool
- PrimeInvestor Overlap Checker
- Dezerv Portfolio Overlap Tool
Just select your funds, and they’ll show:
- % overlap by weight
- list of common stocks
- visual overlap breakdown
No more guessing. You’ll know exactly how concentrated your portfolio is, and therefore, how much unnecessary risk you are carrying.
How much is too much?
The reality is that little overlap is inevitable, but too much is toxic.
| % Overlap | Take Away |
| < 25% | Healthy diversification |
| 25–33% | Not very diversified |
| > 33% | Clone funds |
If your overlap crosses 33%, you’re not diversified. You’re holding multiple wrappers for the same bet.
This is subjective ofcourse, and you could make up your own benchmarks for this. But the core idea remains the same. The higher the overlap, the worse off you probably are when it comes to building a diversified portfolio.
That’s when you start pruning.
How to avoid unwanted overlap?
Knowing overlap exists isn’t enough. You have to build differently.
1. One fund per mandate
Don’t collect funds like badges. Stick to one in each category: large-cap, mid-cap, small-cap.
Every large-cap fund fishes from the same top 100 names anyway. Two funds in the same segment means double exposure, not double safety.
If you must hold two, make sure one is index-based (e.g., UTI Nifty 50 Index Fund) and the other actively managed (e.g., Axis Large Cap Fund). Then, verify their overlap before committing.
Pro-Tip: You can avoid all this and just stick to a well-managed Flexicap fund. Maybe pick two funds with very different approaches to stock picking.
2. Mix across non-overlapping universes
Combine funds that don’t chase the same stocks. For instance, HDFC Large Cap Fund (large-cap) and Nippon India Small Cap Fund (small-cap) have extremely low overlap.
If you don’t want to go the Flexi-cap way, this is one way of avoiding overlap.
If you want thematic exposure (say, infrastructure or renewable energy), ensure your existing funds aren’t already heavy in that sector. Otherwise, you’re just doubling down again.
Pro-Tip: In the long run, generally speaking, thematic funds disappoint. So, why even consider them?
3. Cap your stock-level exposure
Even across funds, a single stock can silently dominate your equity exposure. As mentioned above. Set a hard cap: 5–8% of your total equity portfolio per stock.
For example, if HDFC Bank appears in multiple funds and adds up to 10% of your overall exposure, that’s too much dependence on one company.
This is tough to implement on an ongoing basis, though. It’s just too much work and tracking.
4. Rebalance and prune regularly
Funds evolve. Managers change, strategies drift, and holdings overlap more than before.
Run an overlap check every 12 months or before adding a new fund. If two funds start looking identical, consolidate them. You’ll reduce redundancy. But before selling any mutual funds, always check for exit loads, capital gains taxes, and your investment horizon.
The core + satellite strategy
Think of your portfolio as a solar system. The core part of your portfolio is like the sun: your stable, diversified foundation (e.g., well-managed flexicap, or if you prefer, a large + mid-cap fund). The satellite part of your portfolio is like the planets: smaller, thematic, or sector funds that add unique exposure. This is the riskier part of the portfolio, and you should have it only if you really must. Otherwise, sticking with the core is just fine.
In any case, satellites should complement, not be a copy of the core.
The investor’s checklist
Before you hit “invest,” run through this quick diagnostic:
- List every mutual fund you own.
- Download the latest factsheet or full holdings.
- Compare holdings manually (Excel) or use an online overlap tool.
- Flag any pair with >25–33% overlap (or the limit you set for yourself).
- For flagged funds: decide to keep (with justification), reduce, or replace.
- Before adding a new fund, test its overlap with your existing ones.
- Keep single-stock exposure below 8% of your total equity.
- Revisit every quarter or half-year to stay ahead of overlap creep.
Diversification doesn’t mean multiplying fund names. It means spreading risks across uncorrelated exposures.
So, stop mistaking quantity for diversification. Run your overlap checks. Use the math. Prune the clones. Because the next time markets turn, you’ll either watch all your funds fall together or you’ll thank yourself for finally diversifying for real.
Note:
The purpose of this article is to share insights, data points, and thought-provoking perspectives on investing. It is not investment advice. If you wish to act on any investment idea, you are strongly advised to consult a qualified advisor. This article is strictly for educational purposes. The views expressed are personal and do not reflect those of my current or past employers.
Chinmayee P Kumar is a finance-focused content professional with a sharp eye for investor communication and storytelling. She specializes in simplifying complex investment topics across equity research, personal finance, and wealth management for a diverse audience from first-time investors to seasoned market participants.