Let’s clarify what a portfolio means:
Your risk tolerance, financial objectives, and investing horizon determine the mutual funds you select to diversify your portfolio. “Avoid putting all of your eggs in one basket.” After determining your financial requirements, invest in mutual funds that meet those demands. For example, if you are risk averse and want the security of your primary amount, you may prefer debt instruments.
An investor’s collection of various investment holdings is called a portfolio. A person can choose from a large range of mutual funds, including debt, stocks, small-cap, gold, and sector funds like medicine, IT, and cars. A detailed list of every mutual fund you own is contained in your mutual fund portfolio.
It is important to have a varied portfolio; this cannot be emphasized enough. Long-term investors, in particular, try to avoid funds that invest in the same underlying assets to reduce any risks related to market declines. If, however, you invest in other funds holding similar debt securities, your portfolio will wind up overlapping.
How does your portfolio overlap?
Mutual fund portfolio overlap might happen if you invest in two or more different mutual funds that own shares of the same business. You invest in many funds to diversify your financial portfolio. If the money you put in buys the same Asset Class with the same set of securities, your aim of diversifying the portfolio will not be achieved.
Fund overlapping occurs when an investor allocates their assets among several mutual fund schemes with identical holdings. This undermines the intended diversification of your portfolio and makes you more vulnerable to market risk. You should invest in a range of mutual funds that are managed by several asset management companies to diversify your portfolio.
For instance:
Suppose you invest in two different funds i.e., “A” mutual fund scheme and “B” mutual fund scheme.
Following are the top 5 holdings of each scheme –
| A Scheme | Weightage (%) | B Scheme | Weightage (%) |
| Reliance | 9% | Reliance | 8% |
| TCS | 6% | Infosys | 6% |
| SBI | 8% | Larsen | 8% |
| Infosys | 4% | Axis Bank | 7% |
| HDFC Bank | 7% | Bajaj FinServ | 6% |
We can see that Reliance and Infosys have common holdings from the above analysis. Hence, the mutual fund portfolio overlaps. Additionally, there is a risk that two large-cap funds (or funds in a similar category) from separate AMCs may have similar portfolio holdings.
You may increase the diversity of the mutual funds in your portfolio by spreading your investments across different asset classes. Comparable funds with low performance will likely perform poorly as well if there is portfolio overlap. This Overlap will consequently increase the total loss and risk of the portfolio.
To avoid Mutual Fund Overlap, you can
- Diversify your mutual fund investment from different sectors.
- Compare portfolios of two mutual fund schemes to avoid investing in the same stock.
- Avoid investing in too many schemes by the same Fund Manager.
- Spread out investment amongst large-cap, mid-cap, and small-cap schemes.
Conclusion
A portfolio that satisfies all of your requirements without exhibiting portfolio overlap is optimal. To protect the flow of dividends and return on your investment, think about diversifying the underlying financial assets in your portfolio and aligning them to your financial aim and target. It would be ideal if, while building a new portfolio, you considered the results of your risk profile study. Instead of putting every egg in one basket, you may now select which egg to put in your basket.
Websites to check Portfolio Overlap.
Also Read: Surrender Traditional Insurance Policy & Invest in Mutual Funds?