Understanding Portfolio Overlap in Mutual Fund Schemes and How to Reduce It

Mutual fund schemes are popular investment vehicles in India, offering a convenient way to diversify investments and potentially achieve better returns. However, one aspect that investors need to be aware of is portfolio overlap. Understanding and managing portfolio overlap is crucial for maintaining a well-diversified investment portfolio.

What Is Portfolio Overlap?

Portfolio overlap occurs when multiple mutual fund schemes in an investor’s portfolio hold the same securities. This can lead to overexposure to certain stocks or sectors, increasing the risk of the investment portfolio. For instance, if two or more mutual fund schemes in your portfolio hold significant amounts of the same stock, the performance of that stock will disproportionately affect your overall portfolio.

Why Is Portfolio Overlap a Concern?

Diversification is a key principle in investing, aimed at spreading risk across various assets to reduce the impact of any single investment’s poor performance on the overall portfolio. Portfolio overlap can undermine diversification by concentrating risk in specific securities or sectors. When multiple mutual fund schemes in your portfolio hold the same securities, the benefits of diversification are reduced. This can affect the risk-return profile of your investment portfolio. For example, if a particular stock performs poorly and you have significant exposure to it through multiple mutual fund schemes, your portfolio’s overall performance will be negatively impacted.

Moreover, portfolio overlap can lead to overexposure to certain sectors. If the overlapping securities belong to the same sector, your portfolio becomes more vulnerable to sector-specific risks. This can be particularly concerning in volatile markets or during economic downturns.

How to Check for Portfolio Overlap

To manage portfolio overlap effectively, it is essential to identify and monitor it. Here are some methods to check for portfolio overlap:

Mutual Fund Scheme Fact Sheets: These provide detailed information about the scheme’s holdings. By reviewing the fact sheets of the mutual fund schemes in your portfolio, you can identify common securities and assess the extent of overlap.


Online Tools: Several online tools and platforms offer portfolio overlap check services. These tools allow you to input the mutual fund schemes in your portfolio and generate a report highlighting the overlapping securities.


Fund Manager Reports: Fund managers periodically release reports that provide insights into the scheme’s holdings and performance. Reviewing these reports can help you identify any significant overlap in your portfolio.


Strategies to Reduce Portfolio Overlap
Once you have identified portfolio overlap, the next step is to take measures to reduce it. Here are some strategies to consider:
Diversify Across Asset Classes: Invest in mutual fund schemes that focus on different asset classes, such as equities, bonds, and real estate. This helps spread risk across various types of investments.


Select Schemes with Different Investment Strategies: Choose mutual fund schemes with distinct investment strategies and objectives. For example, you can invest in a large-cap scheme, a mid-cap scheme, and a sectoral scheme to achieve diversification.


Diversify Across Sectors and Geographies: Ensure that your mutual fund schemes invest in a variety of sectors and geographical regions. This reduces the impact of sector-specific or region-specific risks on your portfolio.


Periodic Portfolio Reviews: Regularly review your portfolio to identify any increase in overlap due to changes in fund holdings or market conditions. Timely adjustments help keep your portfolio aligned with your diversification goals.


Conclusion
Understanding and managing portfolio overlap is essential for maintaining a well-diversified investment portfolio. By regularly reviewing your mutual fund schemes, utilizing available tools to check for overlap, and implementing strategies to reduce it, you can enhance the diversification of your portfolio and potentially improve its risk-return profile.