Mutual Fund Portfolio Overlap

What is a portfolio?

In financial terms, a portfolio is like a bucket that has a collection of different investments or financial assets that are owned by an investor. The financial assets can be like equity stocks, debt securities, gold, and many more. The main motive or benefit to create a portfolio is to get the best benefit of diversification and good returns.

What is a mutual fund portfolio?

A mutual fund portfolio is a portfolio that has a collection of mutual funds. Like, an investor has invested his capital in more than one mutual fund, it can be classified as a mutual fund portfolio. Generally, it has been observed that an investor mainly invests their assets in multiple funds of different categories. This is done to diversify the assets within the different categories or options available under mutual funds.

What is mutual fund portfolio overlap?

Mutual fund portfolio overlap means the investments done by the two or more funds are in the same securities. We can understand it better with an example.

Suppose an investor has invested in ABC mutual fund and XYZ mutual fund scheme. Below are the top 5 holdings of both the funds.

Here, we can see that A ltd. and B ltd. are common in both the funds. It means that both the mutual funds are overlapping as they have the same holdings. 

Effects of mutual fund portfolio overlap

Mutual funds are well known for their diversification benefits as they invest in multiple securities & different investment options across the categories & different sectors as per their investment objective. But because of the overlapping of two or more funds in an investor’s mutual fund portfolio, the benefit of diversification reduces. Overlapping has a negative relation with diversification, as the more the overlap, the lower will be the diversification benefit. As if one fund performs negatively, then there is a possibility that the other will also deliver negative performance, as both the funds have the same holdings or investments. Overlapping can sometimes lead to an increase in losses.

How to avoid mutual fund portfolio overlap?

It is very important to avoid the overlapping of mutual funds. Before selecting or investing in the funds, compare the holdings of funds with the funds already present in your mutual fund portfolio. Also, you can consult your mutual fund distributor or financial advisor to compare the funds and check the overlapping & suitability for investments.

Frequently asked questions

• What is mutual fund portfolio overlap?

Mutual fund portfolio overlap means that the two or more funds have the same or common investments. In other words, when the portfolio of two or more funds has common holdings, then their portfolios are said to be overlapping.

• How to check the mutual fund overlapping?

To check or avoid the overlapping, compare the portfolio or holdings of the funds before investing. Also, consult your mutual fund distributor or financial advisor to help with your mutual fund investments.

• How does overlapping in mutual funds effect the returns?

Overlapping of mutual funds decreases the effect of diversification in the investor’s portfolio. It can effect returns in a way that if one fund delivers negative performance, then another fund in your portfolio having the same holding as the former one will also deliver negative returns, thus magnifying your losses.

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