Explained: What is mutual fund overlap and why it could be a concern for investors
Mutual funds are a popular investment vehicle for individuals seeking diversification and professional management of their money. While mutual funds offer many advantages, investors may encounter a potential challenge known as mutual fund overlap. Understanding this concept and learning how to check for it is essential for investors to maintain a well-diversified and efficient investment portfolio.
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Mutual fund overlap occurs when two or more mutual funds in an investor’s portfolio hold similar or identical securities. This overlap can reduce the diversification benefits that mutual funds typically provide, as it increases exposure to specific stocks, sectors, or asset classes.
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For example, if an investor owns two large-cap equity funds, both might hold shares of blue-chip companies like Reliance Industries, Infosys, or HDFC Bank. This duplication can lead to over-concentration in certain stocks or sectors, thereby increasing risk and diluting the purpose of diversification.
Many investors often purchase multiple equity schemes without realizing the extent of potential portfolio overlap, which can largely undermine the intended benefits of
