m.Stock by Mirae AssetOpen Demat Account
m.Stock by Mirae Asset
What Is Mutual Fund Overlap and Its Impact on Your Portfolio

Table of content

What is Mutual Funds Overlap 

Mutual fund investment is a popular strategy for building wealth, but many investors face an issue known as mutual funds overlap. This concept refers to the duplication of the same securities within different funds in your portfolio. Overlap can lead to unintentional concentration in certain stocks, sectors, or asset classes, which may reduce the effectiveness of your diversification strategy. This article will explore what mutual fund overlap means, its impact, and ways to manage it for a well-balanced portfolio.

What is Mutual Funds Overlap?

Mutual fund overlap occurs when multiple funds in your portfolio hold the same stocks or securities. This overlap can limit the diversification that investors seek when spreading their money across different funds. For example, if you invest in several equity funds and each one holds the same high-performing stocks, you might face higher exposure to specific companies or sectors than intended. This reduces the risk mitigation that diversification usually provides in a mutual fund investment.

What is Mutual Fund Portfolio Overlap?

The term "mutual fund portfolio overlap" specifically refers to the degree to which the holdings of different funds within your portfolio are similar or identical. This situation can arise when an investor holds multiple funds that track the same indices or focus on similar sectors or industries. As a result, the investor is essentially over-concentrated in specific securities, reducing the benefits of having a diversified portfolio. Portfolio overlap can also affect the long-term returns of a mutual fund investment, as overexposure to a particular asset can increase volatility and risk.

Effects of Mutual Fund Overlap 

Mutual funds overlap can lead to several adverse effects in your portfolio:

  • Reduced Diversification: The primary purpose of diversification is to spread risk across different asset classes and sectors. When funds overlap, your portfolio may be less diversified than expected.

  • Concentration Risk: A heavy overlap means your exposure to certain stocks or sectors is larger than intended. If those sectors underperform, it could result in more significant losses.

  • Duplicated Costs: Overlapping funds may result in you paying fees multiple times for essentially the same investments. You may be spending more without receiving the diversification benefit you expect.

  • Skewed Risk Profile: Overlap can alter the risk-return profile of your investments. Instead of spreading risk, you may end up with a skewed allocation that exposes you to higher market volatility.

How Can You Reduce Portfolio Overlap in Your Holdings? 

Reducing portfolio overlap starts with conducting a thorough mutual fund overlap comparison of the funds you hold. Some strategies to minimize overlap include:

  • Diversify Across Fund Categories: Instead of holding multiple funds from the same category (like large-cap funds), opt for funds that focus on different market segments, such as mid-cap or small-cap, international markets, or different sectors.

  • Review Fund Holdings Regularly: You can check mutual fund overlap through tools and calculators that allow you to compare mutual fund overlap by examining each fund's portfolio.

  • Consider Index Funds: Investing in index funds that track different indices can also reduce overlap. For instance, one fund could track a broad market index while another could focus on emerging markets.

  • Avoid Redundant Funds: If two funds have a high degree of overlap, consider eliminating one from your portfolio to streamline your investments and reduce duplication.

Process for Identifying Mutual Fund Portfolio Overlap  

Identifying mutual fund portfolio overlap involves a systematic approach to assess the extent to which different funds in your portfolio hold similar securities. Here's a step-by-step guide:

  1. Review Fund Holdings: Begin by examining the individual portfolios of the mutual funds you hold. These are often available through the fund's fact sheet or the asset management company's website. Pay attention to the top holdings and sectors.

  2. Use Online Overlap Tools: Several financial platforms provide portfolio overlap tools that allow you to input multiple funds and check how many securities are held in common across them. These tools offer a percentage of overlap, giving you a clear idea of how concentrated your portfolio is in certain stocks or sectors.

  3. Analyse Sector and Asset Allocation: Even if the individual stocks aren't the same, funds might still be concentrated in similar sectors or industries, which can lead to indirect overlap. Look for high sector allocation similarities, which could create overexposure.

  4. Assess Weightings: It's important not only to identify common securities but also to check their weightings in each fund. A high concentration of the same stock across different funds increases exposure risks.

  5. Compare Indices: If you invest in multiple index funds, compare the indices that the funds track. Index overlap can result in high correlation between the funds, leading to an unintended portfolio concentration.

  6. Monitor Overlap Periodically: Portfolio overlap is dynamic, especially in the case of actively managed funds, and fund holdings change over time. Regular monitoring is necessary to ensure you maintain optimal diversification and avoid concentration risks.

How Can You Reduce Mutual Fund Portfolio Overlap?

Reducing mutual fund portfolio overlap involves a few key actions:

  1. Conduct Regular Portfolio Reviews: It’s essential to review your portfolio regularly to identify any areas where mutual funds overlap has increased.

  2. Opt for Complementary Funds: Instead of choosing funds from the same category, select funds that complement each other in terms of asset allocation, geographical focus, or market capitalisation.

  3. Diversify Across Fund Types: Invest in different types of funds, such as equity, debt, and hybrid funds, to reduce the chances of overlap. This allows you to spread risk across various asset classes.

  4. Use Overlap Checking Tools: Regularly check mutual fund overlap through online tools to monitor any changes and adjust your investments accordingly.

The Importance of Diversification in Avoiding Mutual Fund Overlap? 

Diversification is one of the fundamental principles of mutual fund investment because it helps spread risk across various asset classes. However, when overlap occurs, the primary goal of diversification — reducing risk — is compromised. To ensure proper diversification, you must avoid mutual funds overlap by carefully selecting funds with different holdings, sectors, or strategies.

By focusing on diversification, you can protect your portfolio from market fluctuations in specific sectors. A diversified portfolio helps in spreading risk and providing a balanced return. It also ensures that poor performance in one sector doesn’t drastically affect your overall returns.

Conclusion  

Mutual funds overlap is a significant issue that can undermine the benefits of diversification in your portfolio. By understanding what mutual funds overlap is, how to identify it, and how to reduce it, you can better manage your investments and achieve more stable returns. Tools like mutual fund overlap comparison calculators can help you regularly monitor and adjust your portfolio to avoid unintentional concentration risks. Diversification remains key to managing risk, and eliminating overlap is a crucial step in achieving that goal.

SIPs let you invest small amounts regularly, making it easier to stay consistent with your goals. With time, your money grows faster through compounding, helping you get the most out of your investments. Try our SIP Calculator to see how your money can grow and make smarter plans for your future.

More Related Articles

Can Mutual Fund Schemes Invest in Upcoming IPOs?

Can Mutual Fund Schemes Invest in Upcoming IPOs?

date-icon18 July 2025 | 7 mins read

Can Mutual Fund Schemes Invest in Upcoming IPOs? - H1 Initial Public Offerings (IPOs) have become a buzzword among investors looking for high-growth opportunities. Whether it’s a unicorn startup going public or a reputed company entering the equity market, IPOs attract substantial interest. But what about mutual funds — can they participate in IPOs? And if yes, how does it impact you as an investor in a mutual fund? This article explores the role of mutual funds that invest in IPOs, the process behind such investments, and how you can benefit from this strategy. You’ll also gain insights into how fund managers evaluate IPO opportunities and which mutual funds are more likely to invest in them. Role of Mutual Funds in Equity Markets - H2 Mutual funds play a vital role in India’s equity markets. Managed by professional fund managers, these pooled investment vehicles collect money from multiple investors and allocate it across a portfolio of stocks, bonds, or other assets based on the fund's mandate. In the context of equity investing, mutual funds: Provide diversification to small investors Help in price discovery and market depth Act as long-term institutional investors Reduce risk through strategic asset allocation Given their market presence and influence, mutual funds also participate in IPOs, often subscribing to large portions of new issuances. But this activity is more nuanced than simply bidding for shares. Are Mutual Funds Allowed to Invest in IPOs? - H2 Yes, mutual funds in India are allowed to invest in IPOs — both in the primary market (where shares are first issued) and in the secondary market (where stocks are traded after listing). This means mutual funds can apply for shares during an IPO’s book-building process just like retail investors, high-net-worth individuals (HNIs), and institutional investors. SEBI regulations allow fund managers to allocate a portion of the fund’s assets to IPOs, provided the investment aligns with the scheme's objectives and risk profile. For instance: A large-cap fund may only invest in IPOs of companies expected to be included in large-cap indices A multi-cap or flexi-cap fund has more flexibility to take exposure across market capitalisations, including IPOs An ELSS fund (Equity-Linked Savings Scheme) can also participate in IPOs if it aligns with its tax-saving and equity investment objective So, the short answer is: Yes, mutual funds can and do invest in IPOs — but not all funds, and not always. Why and When Do Mutual Funds Invest in IPOs? - H2 Investing in IPOs offers mutual fund managers several strategic advantages, including: 1. Access to Early Growth Potential - H3 Many IPOs are of young, fast-growing companies. By investing early, mutual funds aim to capture the growth upside before the stock gains mainstream popularity. 2. Price Arbitrage Opportunities - H3 If a mutual fund believes that the IPO is underpriced relative to its intrinsic value, it may invest with the intent of benefiting from listing gains or long-term appreciation. 3. Portfolio Enhancement - H3 Some IPOs bring fresh sector exposure or innovation to the market. Fund managers may invest to diversify or rebalance the portfolio with new-age businesses, like fintech or EV startups. 4. Long-Term Bets - H3 Fund managers often look at IPOs with a long-term lens. The goal isn’t always listing gains but building a position in a company expected to perform well over years. 5. Demand and Liquidity Trends - H3 In bullish markets, IPOs tend to be oversubscribed and see strong listing premiums. Mutual funds may participate to ride the market momentum, especially when investor confidence is high. Factors Fund Managers Consider Before Investing in IPOs - H2 While IPOs are exciting, they are also risky and speculative, especially for companies with no prior listing record. Fund managers conduct rigorous due diligence before deciding to allocate your money to an IPO. Here are the key factors considered: 1. Company Fundamentals - H3 This includes examining the company’s: Revenue and earnings trends Debt levels and capital structure Profit margins and business scalability Competitive advantage and market share 2. Valuation Metrics - H3 Fund managers analyse: Price-to-Earnings (P/E) ratio Price-to-Book (P/B) ratio Enterprise Value to EBITDA (EV/EBITDA) These are compared with listed peers in the same sector. 3. Promoter and Management Track Record - H3 A critical evaluation is made on the credibility, governance standards, and historical performance of the promoters and top management. 4. Utilisation of IPO Proceeds - H3 Fund managers study how the company plans to use the funds—whether for debt repayment, expansion, or general corporate purposes. 5. Macroeconomic and Sector Trends - H3 Sectoral outlooks, regulatory policies, and broader market sentiments also influence IPO investment decisions. 6. Anchor Book Participation - H3 Strong interest from anchor investors (like global funds or sovereign wealth funds) signals confidence in the issue, making it more attractive for mutual fund participation. Best IPO Mutual Funds: What to Look For - H2 If you're keen on gaining exposure to IPOs through mutual funds, it's important to choose the right type of fund. While there’s no official category called “IPO mutual funds,” some schemes actively participate in upcoming IPOs. Here’s what you should look for when selecting such a fund: 1. Fund Category and Investment Mandate - H3 Start by checking the category of the fund. Flexi-cap, multi-cap, and mid-cap funds generally have more leeway to invest in IPOs. These funds are not restricted to a single market capitalisation and often aim to capture high-growth opportunities, making them ideal for IPO exposure. 2. Track Record of Participating in IPOs - H3 Review the fund’s portfolio history. Some mutual funds consistently allocate a portion of their assets to new listings. You can find this information in the fund’s monthly factsheet or portfolio disclosure. Look for funds that have a pattern of investing in IPOs over time—not just as a one-off move. 3. Fund Manager's Experience and Strategy - H3 A skilled fund manager makes a significant difference. The manager's ability to evaluate IPO valuations, industry potential, and company fundamentals is crucial. Look for funds managed by professionals with a proven track record in equity investing and a sound IPO selection approach. 4. Diversification and Risk Management - H3 An ideal fund won’t rely heavily on IPOs alone. Instead, it will use IPO investments as part of a broader equity strategy. Ensure that the fund holds a well-diversified portfolio alongside its IPO allocations to reduce volatility and balance risk. 5. Consistent Performance Over Market Cycles - H3 While past performance isn’t a guarantee of future returns, funds that have consistently performed well across different market cycles often reflect strong management and strategy. Look at long-term performance metrics like 3-year or 5-year returns instead of just recent gains. 6. Transparency and Reporting - H3 Good IPO-investing funds are transparent about their holdings. Choose funds that provide detailed disclosures about their portfolio, including new IPO allocations, so you can track how your money is being deployed. Also, read the scheme information document (SID) to understand the fund’s mandate and whether it allows active IPO participation. Should You Invest in a Mutual Fund That Invests in IPOs? - H2 Pros: Access to IPOs without applying individually Professional due diligence and analysis Built-in diversification Potential to capture high-growth opportunities Cons: IPO investments may not always succeed May increase portfolio volatility Returns can be affected by market timing and sentiment If you're a long-term investor, funds that occasionally invest in IPOs can be a good addition to your portfolio — but don’t chase IPO exposure alone. Always assess the fund holistically. Conclusion - H2 Yes, mutual fund schemes in India can and do invest in IPOs, but they do so strategically — not emotionally or impulsively. Fund managers assess multiple factors before deciding to put your money in newly-listed companies. As a retail investor, you benefit from their expertise and risk management process without having to analyse IPOs on your own. If you're looking for exposure to IPOs but want to avoid direct stock-picking, investing in a mutual fund that invest in IPO offers a smart, diversified route. However, always match the fund’s strategy with your risk tolerance, time horizon, and financial goals.

Read More
Mistakes People Make While Investing and How to Fix Them

Mistakes People Make While Investing and How to Fix Them

date-icon10 July 2025 | 7 mins read

Investing can be one of the most effective ways to build wealth over time. Whether you’re investing in mutual funds or stocks, the goal is simple: earning returns that beat inflation and help you achieve financial freedom. However, investing isn’t just about selecting the right stocks or funds — it’s also about avoiding costly mistakes that can slow your progress down.

Read More
How Can ELSS Funds Be Redeemed? Rules for ELSS Withdrawal

How Can ELSS Funds Be Redeemed? Rules for ELSS Withdrawal

date-icon26 June 2025 | 9 mins read

Equity-linked Savings Schemes (ELSS) are a type of mutual fund in India that provide tax relief under Section 80C of the Income Tax Act. ELSS have a three-year lock-in period, during which the amount invested cannot be withdrawn. It is important for investors to know the ELSS redemption process, rules, and tax implications while making their financial plans. This article explores the intricacies of ELSS mutual fund redemption, shedding light on the procedures and considerations.

Read More
View All

FAQ

What is mutual fund overlap?

Mutual fund overlap occurs when two or more mutual funds in your portfolio hold the same stocks or securities. This reduces diversification and can increase risk, as the performance of these funds may become highly correlated.

How can I check for mutual fund overlap?

You can check for mutual fund overlap by comparing the top holdings of each fund. Many online tools also allow you to input multiple funds and assess the percentage of overlap between them.

What are the risks of mutual fund overlap?

Mutual fund overlap exposes you to over-concentration in specific stocks or sectors. This can reduce the benefits of diversification, and if a particular stock or sector underperforms, it may impact multiple funds in your portfolio.

Why is diversification important in mutual fund investments?

Diversification helps spread risk by investing across various asset classes, sectors, or stocks. This reduces the impact of poor performance in any single investment, offering more stable returns over time.

How often should I check my mutual fund portfolio for overlap?

It’s advisable to review your portfolio for overlap at least once a year or whenever you make significant changes, such as adding new funds or increasing your exposure to a particular sector.

Can portfolio overlap affect my returns?

Yes, portfolio overlap can limit the diversification of your investments, making your portfolio more sensitive to the performance of a few stocks. This can increase the potential for losses if those stocks underperform.

How can I reduce mutual fund overlap?

To reduce overlap, consider investing in funds with different strategies, sectors, or regions. Diversify by selecting funds that focus on different asset classes like debt, equity, or international markets.

Is it possible to completely avoid mutual fund overlap?

While it's challenging to avoid overlap completely, you can minimise it by carefully selecting funds with different holdings, strategies, and asset allocations, ensuring you get maximum diversification.

Does mutual fund overlap affect the overall risk of a portfolio?

Yes, overlap increases the overall risk by creating overexposure to specific stocks or sectors. If these investments underperform, the impact on your portfolio will be greater than in a well-diversified portfolio.

Are index funds more prone to overlap?

While within a single index fund there is no scope of overlapping, different index funds are likely to have overlap, especially if they track similar indices. For example, funds tracking the Nifty 50 will hold many of the same stocks, leading to higher overlap.