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.
Mutual Fund Overlap
4 mins read
16 Apr 2024

Mutual funds are a popular choice for investors looking to diversify their portfolios and achieve their financial goals. However, in the world of mutual funds, a phenomenon called "mutual fund overlap" can affect your investments. 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.

What is the meaning of portfolio overlap in mutual funds?

Mutual fund portfolio overlap refers to the similarity in holdings or securities between different mutual fund schemes. When two or more funds have a substantial portion of their portfolios invested in the same stocks, bonds or other assets, it creates a situation of portfolio overlap. This situation can impact the diversification benefits that mutual funds are known for.

Understand mutual fund portfolio overlap with an example

Consider this scenario: Imagine an investor puts money into two separate mutual funds. If these funds both invest in the same company, it creates a portfolio overlap. Consequently, if one fund plummet in value, the investor stands to lose money, as their portfolios mirror each other.

Understanding diversification can pose a challenge for many investors. Simply investing in multiple funds does not automatically ensure diversification. To truly mitigate risk, investors must cultivate a diversified investment portfolio devoid of overlap.

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.

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.

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