What is Mutual Fund Portfolio Overlap & How to Reduce Overlapping?

Mutual Fund Portfolio Overlap
Mutual Fund Portfolio Overlap

Investing in mutual funds serves as a popular avenue for many individuals seeking to cultivate their wealth. However, amidst the myriad investment options, understanding the concept of Mutual Fund Portfolio Overlap emerges as a crucial factor for making informed and diversified investment decisions.

Also Read: How to Convert Physical Mutual Fund Units to Demat Account?

What is Mutual Fund Overlap?

Mutual Fund Overlap refers to a situation where multiple mutual funds in an investor’s portfolio hold a significant number of the same stocks or securities. It’s akin to using the same piece in a puzzle in different places – in investment terms, multiple funds owning identical assets.

What is Portfolio Overlap in Mutual Funds Meaning?

When discussing Mutual Fund Portfolio Overlap, it’s not merely about the count of common stocks between funds but also involves the allocation or weightage of those shared stocks. Higher allocation to common stocks indicates a higher level of overlap between the funds.

Factors to Consider Along with Mutual Fund Portfolio Overlap

Beyond counting common stocks, here are some additional factors to consider alongside Mutual Fund Portfolio Overlap:

  1. Differences in Weights: The difference in the weightage or allocation of common and unique stocks between funds can impact overall performance.
  2. Risk Metrics: Evaluating metrics like standard deviation and Sharpe ratio helps gauge the risk and volatility associated with funds’ returns.
  3. Consistency & Performance: Analyzing a fund’s consistency in outperforming benchmarks and its overall performance against its category peers is crucial.
  4. Fund Managers & AMC Reputation: Consider the track record of the fund managers and the reputation of the Asset Management Company (AMC) in the market.

Why Does Portfolio Overlap Happen?

1. SEBI’s Category-Wise Mandate

SEBI, India’s market regulator, mandates specific investment guidelines for mutual funds based on their categories. For instance, large-cap funds need to invest a significant portion in top market-sized stocks, creating a common universe of stocks. Hence, overlap arises among funds within the same category due to these limitations.

2. AMC-Specific Investment Style

Different Asset Management Companies (AMCs) have unique investment styles, philosophies, and methodologies. Funds from the same AMC might exhibit overlap due to similar stock selection strategies across various fund categories.

Effects of Mutual Fund Overlap

Mutual Fund Overlap can have several implications:

  • Reduced Diversification: Overlap limits diversification, leaving the portfolio more susceptible to concentrated risks.
  • Impact on Returns: Overlapping investments might lead to redundant holdings, potentially impacting overall portfolio performance.
  • Increased Costs: Owning similar stocks through multiple funds might increase transaction and management costs.
  • Liquidity Concerns: Selling shares in multiple overlapping funds simultaneously might affect liquidity due to market price impact.

How Can I Reduce Mutual Fund Overlap in My Portfolio?

  1. Diversification: To decrease overlap, diversify investments across various fund categories. This broadens the stock universe, reducing overlap due to different stock selections in each category.
  2. Invest via Multiple AMCs: Opt for funds from different AMCs to avoid overlap caused by similar investment styles. This diversification across fund houses further minimizes overlapping holdings.

Example of a Mutual Fund Portfolio Overlap

Consider the top holdings of three different large-cap funds – ICICI Prudential Bluechip Fund, SBI Bluechip Fund, and Axis Bluechip Fund. The comparison reveals considerable overlap in their stock portfolios, indicating potential overlapping holdings among these funds.

ICICI Prudential Bluechip FundSBI Bluechip FundAxis Bluechip Fund
Reliance IndustriesICICI BankHDFC Bank
HDFC BankITCBajaj Finance
Larsen & ToubroLarsen & ToubroAvenue Supermarts
Axis BankReliance IndustriesTCS
Bharti AirtelPage IndustriesReliance Industries
Maruti SuzukiMahindra & MahindraKotak Mahindra
Ultratech CementBritanniaLarsen & Toubro
NIFTY 50HDFCMahindra & Mahindra

Challenges of Mutual Fund Portfolio Overlap

Excessive overlap amplifies portfolio risks during market downturns. Achieving genuine diversification requires dissimilarity in strategy and asset mix, which can be challenging when managing multiple funds.

Is It Possible to Avoid Portfolio Overlap?

Achieving absolute zero overlaps might be impractical. However, strategies like diversification across assets, sectors, and conducting thorough research can help minimize overlap significantly.

Should You Be Concerned About a Mutual Fund Portfolio Overlap?

Understanding portfolio overlap is crucial for investors. It’s essential to maintain a portfolio overlap check and focus on managing outcomes, evaluating fund consistency, and managing skills.

Why Diversify Your Mutual Fund Portfolio?

Diversifying your portfolio across different asset classes and sectors maximizes returns and mitigates risks. This approach ensures downside protection and controls market volatility by not significantly impacting the portfolio if one asset underperforms.

In conclusion, comprehending Mutual Fund Portfolio Overlap is imperative for crafting a well-diversified investment strategy. Employing strategies to minimize overlap, such as diversification and thorough research, can aid investors in optimizing their portfolios for better risk-adjusted returns.

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