What Is Mutual Fund Overlap?

Mutual funds provide a simple approach to wealth building for many investors who seek diversification without having to pick individual stocks. Whether you are a first-time investor starting a small Systematic Investment Plan (SIP) or a seasoned market participant building a multi-fund portfolio, mutual funds offer a lucrative way to spread risk across sectors and asset classes. 

Yet, without active monitoring, investors can inadvertently concentrate their holdings by buying multiple funds that own the same stocks or bonds. This can undermine the efficacy of your portfolio in diversifying capital across assets. 

Just as wearing two identical life jackets doesn’t make you safer, owning overlapping funds does not reduce risk. In this article, we’ll understand what mutual fund overlap is, why it matters, how to detect it, strategies to manage or avoid it, and key takeaways to keep your portfolio truly diversified.

Introduction To Mutual Fund Overlap

Mutual fund overlap occurs when two or more funds in your portfolio hold many of the same securities like equities, bonds or other instruments. This results in concentrated exposure rather than the broad diversification you intend by investing in multiple funds. 

For instance, if you invest in two large-cap equity funds, both may carry heavy stakes in top companies. Although you hold multiple funds, you have effectively added little new exposure beyond those core holdings.

Overlap reduces the risk-mitigating benefits of a multi-fund strategy. When market conditions sour for the overlapping assets, your portfolio suffers more than expected because losses are repeated across funds. 

Conversely, if you own funds with genuinely distinct holdings – for example, a technology-focused fund alongside a government bond fund, your gains and losses tend to offset, smoothing returns over time. 

So how do you measure overlap? This involves comparing fund holdings, quantifying the percentage of shared assets, and evaluating how much of Fund A’s portfolio is already represented in Fund B. By understanding and controlling mutual fund overlap, investors can ensure that their money is spread across different sectors, regions and strategies, thus maximising diversification and reducing unintended concentration risk.

Why Fund Overlap Matters

Mutual fund overlap is important to consider for several reasons. Here are some of them:

1. Diluted Diversification

At its core, diversification aims to spread risk. Holding multiple funds that own the same top-weight stocks or bonds counters this goal. When the overlapping securities’ prices decline, the collective impact on your portfolio is magnified, not cushioned.

2. Increased Volatility

Overlap amplifies portfolio volatility. Suppose three of your equity funds hold the same 10% position in a single mid-cap stock. A 20% drop in that stock can cause significant declines across all three funds, exposing you to outsized short-term swings.

3. Hidden Concentration

Smaller retail investors may assume that investing in four different “top performing” funds ensures diversification. In reality, they may unknowingly build a portfolio with 40% exposure to a handful of blue-chip names. Without overlap analysis, such concentration goes unnoticed.

4. Opportunity Cost

Capital allocated to overlapping funds could be better deployed in genuinely distinct strategies like sector funds, thematic funds or international allocations, that offer uncorrelated returns. Overlap locks up your money in the same bets, missing opportunities elsewhere.

5. Fee Inefficiency

Mutual funds charge management fees regardless of overlap. Paying multiple funds for similar exposures means you incur redundant costs without incremental diversification benefits, diminishing net returns.

6. Asset Allocation Drift

As markets move, overlapping positions can skew intended allocations. If large-cap stocks rally, multiple funds holding those stocks will cause your equity allocation to drift upward, requiring rebalancing to maintain risk targets.

7. Regulatory and Tax Implications

In India, some sector-specific or ELSS (tax-saving) funds have lock-in periods. Overlap may force you to remain invested in underperforming overlapped holdings for tax reasons or regulatory constraints, hindering agility.

The Impact Of Fund Overlap: An Example 

Consider a ₹2,00,000 investment split equally between two funds, A and B. If both funds carry 20% in Company X, you effectively have 40% of your capital riding on that single stock. A 10% fall in Company X erodes ₹8,000 of your portfolio value – that is, double the impact that you would experience, had you held one fund alone.

By recognising these drawbacks, investors can appreciate why monitoring and managing mutual fund overlap is vital. True diversification demands a conscious selection of funds with complementary holdings, balancing risk and return while avoiding unintended concentration.

How To Identify Mutual Fund Overlap

1. Manual Holding Comparison

Begin by downloading the latest portfolio holdings of each fund (available in monthly fact sheets). Create a consolidated list of securities across all funds. Count the number of times each security appears and calculate its weight in each fund. A security present in more than one fund signals overlap.

2. Top 10 Holdings Analysis

Focus on the top 10 positions, which often constitute 40–60% of a fund’s assets. If multiple funds share three or more top holdings, investors can infer significant overlap. This quick check highlights major duplications without analysing the entire portfolio.

3. Quantitative Overlap Metrics

Use this formula to infer overlap between fund A and fund B:

Overlap(A,B) = [2 × Number of Common Stocks] ÷ [Total Stocks in A + Total Stocks in B] × 100

This percentage reflects how similar two funds are. An overlap above 20% merits deeper scrutiny, while over 40% often indicates near-duplication.

4. Portfolio Overlap Tools

Several platforms offer overlap analysis:

• Morningstar portfolio X-Ray: Upload your holdings or fund names to receive an overlap report and asset-class breakdown.
• Fund houses’ apps: Some AMCs provide built-in overlap analytics for their own products and competitors.

5. Sector and Theme Overlap

Overlap is not only at the stock level but also at the sector or theme level. Two funds may hold different stocks but concentrate 30% each in technology. Use sector weight charts to spot such hidden concentrations.

6. Correlation Analysis

While not a direct measure of overlap, high return correlation between funds over several years suggests similar holdings. A correlation coefficient above 0.9 indicates near-identical performance drivers.

7. Advisor or Robo-Advisor Reports

Financial advisors often run overlap reports as part of portfolio reviews. Robo-advisors typically enforce low overlap via algorithmic diversification. Reviewing their reports can guide self-directed investors.

8. Automated Portfolio Tools

Third-party apps offer portfolio health checks, including overlap metrics, reminding investors to rebalance when overlap thresholds are breached.

By applying these identification methods, investors gain clarity on how funds in their portfolio relate. The goal is to maintain an overall overlap below 10–15%, which ensures robust diversification.

How to Manage or Avoid Overlap

Here are some effective ways to mitigate and avoid fund overlap:

1. Diversify across fund categories: Invest in a mix of large-cap, mid-cap, small-cap, multi-cap, thematic and debt funds. Avoid loading multiple funds from the same category. For example, choose one large-cap equity fund rather than two or three.
2. Choose funds with distinct strategies: Pair a growth-oriented fund with a value fund, or a sector fund (e.g. healthcare) with a passive index fund. Different management styles and mandate scopes reduce overlap.
3. Limit number of equity funds: For most retail portfolios, 4–6 equity funds suffice. Beyond that, overlap risk increases. Prioritise broad-based funds and one thematic or sector fund if desired.
4. Use asset allocation funds: Consider Balanced or Hybrid funds that automatically blend equity and debt. They reduce the need to hold separate debt funds, avoiding overlap with standalone bond schemes.
5. Review portfolio regularly: Schedule quarterly or biannual reviews. Re-run overlap analysis, compare sector weights and adjust holdings. Redeem partial units from overlapping funds and reallocate to underrepresented areas.
6. Consider direct plans or ETFs: Exchange-Traded Funds (ETFs) and index funds offer transparent, low-cost broad market exposure with minimal overlap. Their fixed baskets help manage unintended duplication.
7. Leverage model portfolios: Use model portfolios from trusted advisors or robo-advisors designed to minimise overlap via algorithmic selection. These models rebalance automatically to maintain low overlap.
8. Rebalance via systematic transfer plans (STP): If two funds overlap moderately, use an STP to gradually shift investment from one to another over time, avoiding lump-sum redemptions that trigger capital gains.
9. Monitor sector weights: Set overlap limits at the sector level by capping any single sector exposure at 25–30%. If two funds together exceed that limit, reduce your allocation.
10. Educate and document: Maintain a portfolio spreadsheet capturing key holdings, category and overlap percentages. Use it to guide new allocations, ensuring fresh funds add genuine diversification.

By proactively selecting complementary funds, limiting portfolio breadth and conducting regular overlap checks, investors can preserve diversification, manage risk and enhance long-term returns.

Conclusion

True diversification cannot be ensured by simply holding multiple funds. It demands thoughtful selection to avoid overlapping exposures that can amplify risk, inflate costs and dilute returns. Mutual fund overlap arises when portfolios share significant common holdings at the stock or sector level, which undermines the very purpose of spreading risk. 

Detecting overlap either manually through spreadsheet comparisons or via robust analytical tools can reveal duplications that might be invisible on the surface. Once identified, overlap can be managed by choosing funds with distinct mandates, capping allocations to single categories, and regularly rebalancing holdings. Tools such as ETFs, hybrid funds and robo-advisor model portfolios offer alternative pathways to achieve broad exposure without redundancy.

Ultimately, a well-constructed portfolio balances growth potential with controlled risk. Limiting mutual fund overlap to under 15% ensures that no single market movement or sector slump derails performance. With disciplined monitoring, strategic fund selection and periodic rebalancing, investors can harness true diversification by protecting capital during downturns and capturing gains across market cycles.

Additional Read: A complete guide on Mutual Fund Investing | Mirae Asset

Additional Read: How to Build a Balanced Mutual Fund Portfolio in 2025