Mutual Fund Overlap

Mutual fund portfolio overlap is the process of identifying and calculating the common stocks and their average weightage between multiple mutual fund schemes.
EXPLORE FUNDS
What is a Mutual Fund Portfolio Overlap
EXPLORE FUNDS
4 mins read
08-August-2024

Mutual fund overlap occurs when multiple funds hold the same investments, reducing diversification and increasing risk. This lack of diversification means that the risk isn't spread out effectively. Therefore, investors should avoid overlap to ensure their portfolio is properly diversified and risk is minimised. This article explores the concept of mutual fund overlap, why it occurs, and how to address it effectively.

What is mutual fund overlap?

Mutual fund overlap, simply put, is the presence of the same or similar securities across different mutual fund schemes. It happens when multiple mutual funds hold positions in identical or comparable securities within their portfolios. While some degree of overlap is expected due to market conditions, excessive overlap can lead to unintended concentration of risk.

Understand mutual fund portfolio overlap with an example

Diversification and portfolio overlap

Diversification is a fundamental strategy in investment aimed at reducing risk by spreading investments across various financial instruments, industries, and other categories. However, understanding and achieving true diversification can be challenging for many investors.

Consider this scenario: Imagine an investor who has allocated their money into two separate mutual funds. Although these funds are different, both invest heavily in the same company. This situation results in a portfolio overlap. If the company these funds invest in experiences a significant drop in value, the investor will face considerable losses because both funds will mirror each other’s decline.

Simply investing in multiple mutual funds does not guarantee diversification. True diversification requires a careful selection of investments that do not overlap. Investors need to ensure their portfolios are spread across different sectors, asset classes, and geographic regions to effectively mitigate risks.

Example of portfolio overlap

Fund Name

Investment in Company A

Investment in Company B

Investment in Company C

Mutual Fund 1

40%

30%

30%

Mutual Fund 2

50%

20%

30%

Combined Portfolio

45%

25%

30%


In this example, both Mutual Fund 1 and Mutual Fund 2 have significant investments in Company A. As a result, the combined portfolio has 45% of its assets in Company A, illustrating a lack of diversification. If Company A's stock plummets, the investor’s overall portfolio would suffer greatly, highlighting the importance of avoiding such overlaps for effective risk management.

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What are the causes of mutual fund overlap?

While there might be many different reasons for portfolio overlap to occur, here are a few major reasons listed:

  • Benchmark Tracking: Many mutual funds aim to mimic a specific market index or benchmark. As a result, they may invest in the same stocks as those present in the benchmark.
  • Sectoral Focus: Funds focusing on specific sectors or industries are likely to have overlapping holdings. For instance, technology sector funds may invest in similar tech companies.
  • AMC or Fund Manager’s investment style or choices: Investment decisions made by fund managers can lead to overlap if they favour similar stocks or sectors.
  • Following the hot trends: Imagine everyone's buzzing about green energy companies. This excitement can lead many mutual funds to invest in these same stocks. As a result, even if you choose different funds, they might hold similar assets, reducing the diversification benefit.
  • Similar investment styles: Fund managers may be influenced by the same market trends or data, leading them to make similar investment choices. Additionally, they might follow popular investment strategies, causing overlap across different funds.

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Frequently asked questions

How much overlap is good in mutual fund?

A slight overlap across funds may not significantly affect your overall portfolio returns. However, if the overlap is high, then your portfolio may be exposed to company-specific risks.

How do you find overlapping stocks in mutual funds?

You can identify overlapping stocks by comparing the holdings of different mutual funds. Many financial websites also offer portfolio analysis tools to help with this.

Why is portfolio overlap concerning?

Excessive mutual fund overlap can heighten risk, curtail the advantages of diversification, and result in diminished returns. Effectively managing overlap is essential for maintaining a balanced portfolio.

How does overlap affect investment risk?

Concentrated risk is a consequence of overlap. Poor performance of shared holdings can adversely affect multiple funds, amplifying the potential for losses.

Is there a mutual fund overlap tool?

There are various online tools and resources available that can help investors analyse and identify overlap between mutual fund holdings for better portfolio management.

How do you calculate overlap funds?

To calculate overlap between mutual funds, investors can compare the holdings of different funds and look for common stocks, sectors, or industries. Quantitative measures like correlation coefficients can also be used.

How do you prevent overlapping in mutual funds?

To prevent overlapping in mutual funds, investors should diversify their investments across different asset classes, sectors, and industries. Regularly reviewing and rebalancing the portfolio can also help minimise overlap.

Is portfolio overlap bad?

While some level of overlap is inevitable, excessive portfolio overlap can increase concentration risk and limit diversification. It may lead to heightened sensitivity to specific market movements or events.

How much fund overlap is bad?

There is no specific threshold for what constitutes ‘bad’ fund overlap, as it depends on individual investment goals and risk tolerance. However, excessive overlap, where a significant portion of the portfolio is duplicated across funds, should be avoided.

What is overlap in mutual funds?

Overlap in mutual funds occurs when multiple funds hold significant positions in the same securities, reducing diversification and increasing risk if those securities decline in value.

How much overlap is good in mutual fund?

A slight overlap across funds may not significantly affect your overall portfolio returns. However, if the overlap is high, then your portfolio may be exposed to company-specific risks.

How do you find overlapping stocks in mutual funds?

You can identify overlapping stocks by comparing the holdings of different mutual funds. Many financial websites also offer portfolio analysis tools to help with this.

Why is portfolio overlap concerning?

Excessive mutual fund overlap can heighten risk, curtail the advantages of diversification, and result in diminished returns. Effectively managing overlap is essential for maintaining a balanced portfolio.

How does overlap affect investment risk?

Concentrated risk is a consequence of overlap. Poor performance of shared holdings can adversely affect multiple funds, amplifying the potential for losses.

Is there a mutual fund overlap tool?

There are various online tools and resources available that can help investors analyse and identify overlap between mutual fund holdings for better portfolio management.

How do you calculate overlap funds?

To calculate overlap between mutual funds, investors can compare the holdings of different funds and look for common stocks, sectors, or industries. Quantitative measures like correlation coefficients can also be used.

How do you prevent overlapping in mutual funds?

To prevent overlapping in mutual funds, investors should diversify their investments across different asset classes, sectors, and industries. Regularly reviewing and rebalancing the portfolio can also help minimise overlap.

Is portfolio overlap bad?

While some level of overlap is inevitable, excessive portfolio overlap can increase concentration risk and limit diversification. It may lead to heightened sensitivity to specific market movements or events.

How much fund overlap is bad?

There is no specific threshold for what constitutes ‘bad’ fund overlap, as it depends on individual investment goals and risk tolerance. However, excessive overlap, where a significant portion of the portfolio is duplicated across funds, should be avoided.

What is overlap in mutual funds?

Overlap in mutual funds occurs when multiple funds hold significant positions in the same securities, reducing diversification and increasing risk if those securities decline in value.

How much overlap is acceptable?

An overlap of up to 10-15% is generally considered acceptable, as it allows for some common holdings without significantly increasing risk.

What is the mutual fund portfolio overlap tool?

The mutual fund portfolio overlap tool is an online utility that identifies and analyses overlapping investments across different mutual funds in a portfolio.

How do I use the mutual fund portfolio overlap tool?

To use the mutual fund portfolio overlap tool, input the names or ticker symbols of the mutual funds in your portfolio. The tool will then display the overlapping securities and their respective percentages.

What does a high degree of overlap indicate?

A high degree of overlap indicates that multiple mutual funds hold substantial amounts of the same securities, which may reduce the benefits of diversification and increase overall portfolio risk.

Is some degree of overlap acceptable?

Yes, some degree of overlap is acceptable as it can be difficult to achieve complete diversification. A small overlap does not necessarily pose significant risk.

How can mutual fund overlap information help in portfolio management?

Mutual fund overlap information helps investors identify areas of redundancy in their portfolios, enabling them to make adjustments for better diversification and risk management.

Should overlap be the only factor in fund selection?

No, overlap should not be the only factor in fund selection. Investors should also consider other factors such as fund performance, expense ratios, and investment strategy.

What other performance metrics should I look at besides overlap?

Besides overlap, investors should look at metrics like historical returns, volatility, expense ratios, and the fund manager’s track record.

How does the tool help in assessing risk?

The tool helps in assessing risk by identifying concentrated exposures within a portfolio, allowing investors to diversify their investments and reduce potential losses from individual securities.

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