What Is Portfolio Overlap and Why Should You Care?
What Is Portfolio Overlap and Why Should You Care?
You may believe that by investing in multiple mutual funds, you’re diversifying your portfolio. But what if those funds are holding the same stocks? That’s where portfolio overlap comes in—a silent disruptor that can undermine your diversification and expose you to higher-than-expected risk.
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What Is Portfolio Overlap?
Portfolio overlap occurs when two or more mutual funds in your portfolio invest in the same underlying stocks or securities.
Example:
You invest in:
- Fund A: HDFC Top 100 Fund
- Fund B: ICICI Prudential Bluechip Fund
Both might hold heavyweights like Reliance Industries, HDFC Bank, and Infosys—meaning your exposure to these stocks gets multiplied even if you’re invested in two “different” funds.
Why Portfolio Overlap Is a Problem
❌ False Diversification
You think you’ve spread your risk across multiple funds, but you’re actually doubling down on the same companies.
🎢 Increased Risk
If a common stock across 3–4 funds tanks, your entire portfolio takes a hit—even though you believed it was diversified.
📉 Poor Risk-Adjusted Returns
Too much overlap can tilt your portfolio heavily toward a particular sector or market cap—affecting balance and performance.
How to Check for Portfolio Overlap
You can use free online tools like:
- Morningstar India
- Valueresearchonline.com
- Freefincal’s Portfolio Overlap Tool
Just input two fund names, and you’ll get the % of common holdings, along with weightage.
Thumb Rule:
- <30% overlap = Acceptable
- 30–50% = Watch closely
- 50% = Consider replacing one fund
Common Scenarios of High Overlap
🔹 Investing in Multiple Large-Cap Funds
Most large-cap funds tend to hold the same top NIFTY50 stocks.
🔹 Combining Active Funds in the Same Category
Two aggressive flexi-cap funds can have 50–60% overlap.
🔹 SIPs in Different Funds from the Same AMC
Some AMCs have internal style similarities or shared stock picks.
How to Avoid or Manage Portfolio Overlap
✅ Diversify Across Fund Categories
Instead of holding 3 large-cap funds, diversify into:
- 1 Large-Cap Fund
- 1 Mid/Small-Cap Fund
- 1 Hybrid or Flexi-Cap Fund
✅ Choose Passive + Active Mix
Index funds + 1 or 2 well-managed active funds can reduce overlap and costs.
✅ Monitor Annually
Check your portfolio overlap at least once a year, or after major fund rebalancing.
✅ Exit the Redundant Fund
If two funds overlap heavily and one has consistently underperformed, consider exiting.
Real-Life Example
Ravi, a 30-year-old investor, held:
- Mirae Asset Large Cap
- SBI Bluechip
- ICICI Bluechip Fund
All 3 had >60% overlap with top NIFTY50 stocks. Despite holding “3 funds,” Ravi’s portfolio behaved like 1 fund.
✅ Solution:
He exited 2 of them and reallocated into a mid-cap and a hybrid fund to improve true diversification.
Conclusion
Just holding more funds doesn’t mean better diversification. Portfolio overlap can silently increase your risk and reduce the effectiveness of your investment strategy.
By being aware, checking overlap, and consciously diversifying across fund types, you can build a well-balanced, efficient portfolio.
🚀 Need Help Assessing Your Portfolio?
At Goodwill Wealth Management, we analyze your portfolio for hidden overlaps, identify underperformers, and help you rebalance intelligently.
Talk to our experts today to make sure your diversification is actually working for you.