The Securities and Exchange Board of India (SEBI) recently introduced various measures to protect mutual fund investors’ interests and curb mis-selling. The regulator directed AMCs (Asset Management Companies) to disclose, on their websites, the monthly category-wise portfolio overlap. “Mutual Funds shall disclose category-wise portfolio overlap levels, i.e., equity schemes vs other equity schemes, debt schemes vs other debt schemes, and hybrid schemes vs other hybrid schemes. Such disclosure shall be published on the AMC website for investor communication on a monthly basis,” SEBI said in its circular.
Additionally, the circular noted that “for any scheme offering in sectoral/thematic equity category, Mutual Funds shall ensure that no more than 50% of the scheme’s portfolio would overlap with other equity schemes in sectoral/thematic category and other equity schemes categories except for large-cap schemes”.
“The overlap condition shall be computed on a quarterly basis using the daily portfolio overlap values, i.e. the average of daily portfolio overlap values over a quarter,” the circular mentioned while setting out a detailed methodology for computing portfolio overlap. The regulator has also given a time of up to 3 years to mutual funds, depending on scheme categories, to meet the overlap criteria and realign their portfolios.
Multiple schemes within the same AMC hold largely identical portfolios, even though they are marketed differently. According to an analysis by Livemint on data shared by PRIME Database, several mutual fund schemes offered by different fund houses show significant portfolio overlap. Here’s a look at some of the schemes where the overlap exceeds 50%.
| Mutual Fund | Scheme A | Scheme B | Overlap % |
|---|---|---|---|
| AXIS MUTUAL FUND | AXIS BUSINESS CYCLES FUND | AXIS ELSS TAX SAVER FUND | 54.46 |
| AXIS MUTUAL FUND | AXIS BUSINESS CYCLES FUND | AXIS LARGE & MID CAP FUND | 51.15 |
| AXIS MUTUAL FUND | AXIS BUSINESS CYCLES FUND | AXIS VALUE FUND | 55.01 |
| AXIS MUTUAL FUND | AXIS ELSS TAX SAVER FUND | AXIS ESG INTEGRATION STRATEGY FUND | 53.24 |
| AXIS MUTUAL FUND | AXIS ELSS TAX SAVER FUND | AXIS FOCUSED FUND | 57.05 |
| AXIS MUTUAL FUND | AXIS ELSS TAX SAVER FUND | AXIS LARGE CAP FUND | 67.10 |
| DSP MUTUAL FUND | DSP ELSS TAX SAVER FUND | DSP LARGE & MID CAP FUND | 78.05 |
| DSP MUTUAL FUND | DSP ELSS TAX SAVER FUND | DSP LARGE CAP FUND | 53.10 |
| DSP MUTUAL FUND | DSP FLEXI CAP FUND | DSP FOCUSED FUND | 61.42 |
| HDFC MUTUAL FUND | HDFC ELSS TAX SAVER | HDFC FOCUSED FUND | 67.59 |
| HDFC MUTUAL FUND | HDFC LARGE & MID CAP FUND | HDFC MULTI CAP FUND | 56.70 |
| HDFC MUTUAL FUND | HDFC LARGE CAP FUND | HDFC ELSS TAX SAVER | 50.71 |
| ICICI PRUDENTIAL MUTUAL FUND | ICICI PRUDENTIAL BUSINESS CYCLE FUND | ICICI PRUDENTIAL LARGE CAP FUND | 77.51 |
| ICICI PRUDENTIAL MUTUAL FUND | ICICI PRUDENTIAL ELSS TAX SAVER FUND | ICICI PRUDENTIAL ESG EXCLUSIONARY STRATEGY FUND | 59.49 |
| KOTAK MAHINDRA MUTUAL FUND | KOTAK CONTRA FUND | KOTAK ELSS TAX SAVER FUND | 55.24 |
| KOTAK MAHINDRA MUTUAL FUND | KOTAK CONTRA FUND | KOTAK FOCUSED FUND | 55.92 |
| KOTAK MAHINDRA MUTUAL FUND | KOTAK CONTRA FUND | KOTAK LARGE & MIDCAP FUND | 55.52 |
| KOTAK MAHINDRA MUTUAL FUND | KOTAK CONTRA FUND | KOTAK LARGE CAP FUND | 52.39 |
| KOTAK MAHINDRA MUTUAL FUND | KOTAK ELSS TAX SAVER FUND | KOTAK ESG EXCLUSIONARY STRATEGY FUND | 56.21 |
| KOTAK MAHINDRA MUTUAL FUND | KOTAK LARGE & MIDCAP FUND | KOTAK FLEXICAP FUND | 59.09 |
Source: primeMFdatabase.com
Data compiled on the basis of weightage of holdings of listed Indian companies in the equity schemes – Top 10 mutual funds on the basis of MAAUM.
What it means for investors?
Portfolio overlap is a hidden risk, as it may affect your portfolio’s performance. This means that if one mutual fund underperforms, there’s a high probability the other will also underperform, since the underlying stocks of both funds overlap significantly. It is a hidden risk because it creates concentration you don’t see – even when your portfolio looks diversified on the surface.
“Portfolio overlap reduces the true benefit of diversification. When multiple mutual fund schemes hold the same stocks, the portfolio may appear diversified because it contains several funds, but in reality, exposure may be concentrated in a limited set of companies. This can lead to stock level concentration risk, higher volatility than expected and a simultaneous fall in multiple schemes during market corrections,” Pankaj Mathpal , CEO of Optima Money Managers, told Livemint.
Does it only occur if you invest in multiple schemes of the same AMC?
Portfolio overlap can occur both within the same AMC and across different AMCs. Explaining the reasons behind the overlap, Mathpal said that, within the same AMC overlap may arise due to a common investment philosophy, centralised research teams, or similar model portfolios across schemes. However, across different AMCs, overlap is also common because high-quality or large-cap stocks are widely owned across the industry.
“A multi-cap and a flexi-cap fund of the same AMC may hold several common stocks. Two flexi-cap funds from different AMCs may have similar top holdings. Therefore, overlap is not just AMC-specific; it is often market-driven,” Mathpal added.
What should investors do?
There is no fixed rule for an exact number, but experts generally recommend limiting portfolio overlap to around 30%. Investors can reduce overlap by avoiding multiple schemes from the same fund house and by diversifying across different mutual fund categories. In most cases, holding 3 to 5 carefully selected mutual fund schemes is sufficient to achieve optimal diversification.
“It is practically impossible to eliminate portfolio overlap entirely, especially within the same fund category. Certain large-cap and market-leading stocks tend to appear across multiple schemes. However, investors can manage and limit excessive overlap by diversifying across categories. For example, combining large-cap, mid-cap, and small-cap funds. Investors should aim to limit portfolio overlap to a maximum of 30%,” Mathpal told Livemint.