Mutual Fund Portfolio Overlap

You can pick a bunch of mutual funds, thinking you’ve spread your money smartly. But some mutual funds are loaded with the same stocks. That’s exactly how portfolio overlap sneaks up on investors.

Many investors don’t even realize it’s happening in their portfolio. Yet it can silently reduce the benefits of diversification they were chasing. 

Understanding mutual fund portfolio overlap, knowing how to check it, and recognizing how much is acceptable can make a massive difference in long-term investing outcomes.

What Is Mutual Fund Portfolio Overlap?

The phrase may sound technical, but it’s actually simple. When two or more mutual funds hold a significant percentage of the same stocks, their portfolios overlap. Instead of spreading risk across companies and sectors, the investor unintentionally doubles up. Let’s break this down in everyday terms.

Overlap in the Simplest Form

Think of Fund A and Fund B. Both claim to be diversified large-cap funds. But if both hold HDFC Bank, Infosys, and Reliance in heavy proportions, then your money is concentrated in these stocks twice. That overlap means you aren’t truly spreading your risks.

Why Investors Miss It

Most investors look only at fund categories—large-cap, mid-cap, and hybrid. They assume different names mean different holdings. But many large-cap funds end up chasing the same top 20 stocks. The label differs, but the core portfolio overlaps more than expected.

Why Portfolio Overlap Matters

On the surface, overlap looks harmless. But here’s why it should never be ignored.

1. Low Diversification

Most people add more funds, thinking, “the more, the safer.” But when overlap is high, that safety net shrinks. Rather than spreading across hundreds of companies, the portfolio clusters around a few giants like Reliance, HDFC, or Infosys. 

Also, India’s top 20 companies often account for over 70% of large-cap fund portfolios. So, if those few stumble, the so-called diversified portfolio takes the same hit across multiple funds.

2. False Sense of Security

Owning five mutual funds looks comforting on paper. But if all five keep banking on the same 10–15 heavyweights, it’s no different than owning one jumbo fund. 

The illusion here is dangerous, as investors pay five expense ratios, thinking they’re buying variety. Few realize this is why two investors with very different-looking portfolios often show nearly identical returns.

3. Impact on Returns

High overlap makes portfolios move like a pack. If markets rise, they all climb together. When markets dip, they fall just as fast. The cushion investors expect from “different” funds disappears. 

Overlap can even dilute alpha. If a unique mid-cap performer is held by just one fund but gets overshadowed by repeated large-cap overlaps, the overall portfolio won’t reflect the mid-cap’s true impact.

How to Check Mutual Fund Portfolio Overlap

The good news is that overlap can be checked with the right tools and approach. Investors don’t have to guess. Today, several platforms and even AMC disclosures allow you to see how much two or more funds overlap. Here’s how to go about it.

1. Use Portfolio Overlap Calculators

The quickest way to check overlap is with online calculators. Sites like Value Research, Morningstar, and Moneycontrol let you pick two or more funds and show the percentage of common holdings. But they also highlight the weight of those overlapping stocks. 

2. Look at AMC Disclosures

Mutual funds publish fact sheets monthly. By checking the top 10 or top 25 holdings of each fund, investors can manually compare overlaps. While tedious, it gives direct visibility into where the money is going.

3. Watch Categories

Funds within the same category, like large-cap, chase the same benchmark companies. If you already hold one or two large-cap funds, adding a third won’t give you much extra variety. Smart investors use this insight to mix categories and get real diversification.

How Much Overlap Is Acceptable?

This is where investors get stuck. Is a 10% fine? Is 40% too much? There isn’t a magic number carved in stone, but there are practical benchmarks that experienced advisors use. 

1. The 30% Comfort Zone

A lot of advisors suggest keeping overlap below 30%. Why? Because at that level, yes, you’ve got some common holdings, but there’s still enough fresh exposure to other companies. 

India’s top 20 companies dominate the large-cap space. So even with low overlap, you’re naturally repeating some names like HDFC Bank or Infosys. 

2. When 50% Becomes a Red Flag

Crossing the 50% mark is a sign that your diversification has broken down. At that point, you’re paying for multiple funds that all look the same under the hood. 

What smart investors do here is mix categories. Pairing a large-cap fund with a mid-cap or a sector-specific fund gives genuine variety. That way, you’re not doubling down on the same market leaders again and again.

3. A Way to Judge Overlap

Rather than obsessing about hitting 28% or 32%, ask a question: Is this new fund adding anything unique to my portfolio? If the answer is no, then it’s dead weight. 

Some people collect funds without checking if each one adds value. It’s better to hold four thoughtfully chosen funds than seven that all repeat each other.

How to Build Portfolios That Minimize Overlap

You can’t escape overlap completely; it’s always going to be there in some shape or form. But with a little bit of planning, you can keep it under control. Let's see how. 

1. Hold Different Categories

Rather than holding three large-cap funds, use a large-cap fund with mid-cap, small-cap, or sector funds. This spreads exposure naturally.

2. Limit Fund Count

Adding a lot of funds to the portfolio can increase the chances of overlap. Sticking to 4–6 well-chosen funds usually offers enough diversification.

3. Recheck Periodically

Portfolios change over time. What was low overlap last year may not remain so today. A yearly review helps spot changes early.

Case Example: Overlap in Action

Here’s an example that shows how overlap arises.

Investor Scenario

Ravi holds three large-cap funds. Each claims to have 50 holdings. On paper, Ravi believes he owns 150 unique companies.

Reality

Upon checking, Ravi finds 25 companies appear in all three funds, making up nearly 70% of his total investment. In effect, Ravi’s money is concentrated in just 65–70 unique companies, not 150. That overlaps at work.

Conclusion

Portfolio overlap may sound like a technical term, but it's a concept with big consequences. It tells investors if their mutual funds are truly spreading risks or just repeating the same bets. Without checking overlap, portfolios can become concentrated. 

With tools, disclosures, and a basic awareness of fund categories, investors can identify overlaps quickly. For most, a threshold of 20–30% overlap is reasonable. So, overlap awareness gives investors the clarity to build the best portfolio. 

If you want to analyze your holdings and reduce overlap, start building a smarter investment strategy today with the tools on Rupeezy. Start today!

FAQs

1. What is the main risk of high mutual fund portfolio overlap?

High overlap means your money is repeatedly invested in the same few stocks, reducing diversification. This increases vulnerability, especially during market turmoil.

2. Can portfolio overlap happen in debt funds as well?

Yes. While it mostly happens with equity funds, it can happen with debt and impact your diversification. So you need to be cautious.

3. How much overlap is too much?

There is no strict rule but below 30% is a good choice. If it crosses 50%, your portfolio is essentially concentrated in the same holdings.

4. Do SIPs increase the impact of overlap?

Yes, SIPs in overlapping funds keep channeling money into the same companies over time. This gradually builds more concentration if not checked.

5. How can investors reduce mutual fund overlap?

Investors can reduce overlap by spreading their holding across funds. Choosing from multiple sectors and nature can be a great choice.