Mutual Funds Overlap: Before You Add Another Scheme... Read This

The New-Age Investor's Portfolio: Bigger Doesn't Always Mean Better

The Indian mutual fund industry has seen remarkable growth over the last few years. Assets under management (AUM) have crossed around Rs 75 trillion (tn), while monthly SIP inflows remain above Rs 250 billion (bn), reflecting growing investor confidence and financial awareness.

This growth has also changed investor behaviour.

Unlike earlier, when investors typically owned two or three mutual fund schemes, today's portfolios often contain six, eight or even ten funds.

Every new market trend whether artificial intelligence, manufacturing, defence, ESG, momentum investing, or business cycle themes tempts investors to add yet another scheme to their portfolio.

The intention is understandable: More funds should mean more diversification. Ironically, that assumption could often produce the opposite outcome.

Adding more mutual funds without evaluating their underlying portfolios may simply increase exposure to the same companies while creating an unnecessary layer of complexity.

Why Different Mutual Funds Often Own the Same Stocks

At first glance, it may seem surprising that different fund houses end up investing in many of the same companies. The explanation, however, is fairly straightforward.

India's equity market is not evenly distributed across thousands of companies. A relatively small group of large businesses accounts for a significant share of the country's market capitalisation, corporate earnings, and benchmark indices.

Companies such as Reliance Industries, ICICI Bank, Infosys, Bharti Airtel, Larsen & Toubro, and Tata Consultancy Services are not just market leaders they are also among the country's most liquid, well-researched, and fundamentally strong businesses.

When multiple experienced fund managers independently identify quality companies capable of generating sustainable long-term earnings, it's natural for their portfolios to converge.

In other words, portfolio overlap is not necessarily evidence of poor fund management. The real concern arises when investors unknowingly purchase the same investment idea multiple times under different fund names.

When Five Mutual Funds Behave Like Two

An investor who has accumulated five equity mutual funds over the last five years.

His portfolio includes:

• A large-cap fund
• A flexi-cap fund
• An ELSS fund
• A focused fund
• A multi-cap fund

Each scheme has a different investment mandate and is managed by a different asset management company. The investor may feel confident that his Rs 10 lakh portfolio is well diversified.

However, after reviewing the latest portfolio disclosures, he notices that almost every fund has meaningful exposure to Reliance Industries, HDFC Bank, ICICI Bank, Infosys, and Larsen & Toubro.

Although the schemes differ in their remaining holdings, nearly 25-30% of his overall equity allocation is indirectly dependent on the performance of the same set of companies.

The result?

His portfolio contains five mutual funds but considerably fewer independent drivers of return.

This is precisely what mutual fund overlap looks like in practice.

Diversification Should be Measured by Ideas, Not the Number of Funds

Investors often believe diversification improves as they add more schemes. Diversification improves only when every new investment introduces a different source of return.

A cricket team consisting entirely of world-class batters is incomplete without bowlers, wicketkeepers and all-rounders.

Similarly, a portfolio filled with multiple equity funds investing in largely identical companies may appear diversified but remain vulnerable to the same market risks. True diversification comes from combining investments that complement one another rather than replicate each other.

Overlap isn't Always About Identical Stocks

Most investors assume overlap simply means two funds holding the same companies. The reality is more nuanced.

Two funds may have relatively few common holdings but still behave almost identically because they share similar investment styles.

For instance, one fund may predominantly invest in high-quality large-cap companies with strong balance sheets, while another may focus on businesses demonstrating consistent earnings growth.

Despite owning different stocks, both portfolios may outperform during bull markets and struggle during value-led market rotations.

Similarly, two funds may have only moderate stock overlap but remain heavily concentrated in financial services, information technology, and consumer sectors.

This is often referred to as style or factor overlap a form of concentration that is less visible but equally important.

So, investors should evaluate not only the percentage of common holdings but also whether multiple funds are exposed to similar sectors, investment styles, market-cap segments, and economic drivers.

Building a Portfolio That Truly Diversifies Risk

Rather than accumulating mutual funds over time, investors should periodically evaluate whether each scheme serves a distinct purpose.

For example, a thoughtfully constructed portfolio may combine:

• A large-cap or flexi-cap fund as the core holding.
• A mid-cap fund to enhance long-term growth potential.
• An international fund for geographical diversification.
• A hybrid or debt allocation to improve portfolio stability.

Here, each investment contributes something unique instead of repeating existing exposures.

Equally important is reviewing portfolio overlap periodically, especially after prolonged market rallies, category changes, or the launch of new investment themes. Portfolio construction is not about collecting funds; it's about ensuring every investment earns its place.

The Bottom Line

The rapid growth of India's mutual fund industry has provided investors with unprecedented choice. Yet, more choice also increases the likelihood of making portfolios unnecessarily complicated.

Owning a larger number of mutual funds does not automatically translate into better diversification. In many cases, it simply increases exposure to the same underlying businesses through different investment vehicles.

The objective should never be to maximise the number of schemes in a portfolio. Instead, investors should strive to maximise the diversity of ideas, sectors, investment styles and return drivers that those schemes collectively represent.

In investing, diversification isn't about how many mutual funds you own - It's about how differently they behave when markets surprise you.

And that distinction could make all the difference between a portfolio that merely looks diversified and one that truly is.

Invest wisely.

Happy investing.

Disclaimer: This write up is for information purpose and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your investment consultant/advisor. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. Registration granted by SEBI, enlistment as IA with Exchange and certification from NISM no way guarantee performance of the intermediary or provide any assurance of returns to investors.