How to Detect Mutual Fund Overlaps in Your Portfolio?
We recently launched the Mutual Fund Overlap Tool on our platform, which shows the overlap between two or three mutual funds. But how should you use this information? When is overlap significant, and what should you do if there’s a substantial overlap between your funds? Here’s why overlap matters and how to address it.
Why Fund Overlap is a Concern
Mutual fund overlap is the percentage of the portfolio shared by two or more mutual funds. The more similar the funds are, the less diversified your portfolio becomes. This can reduce your portfolio’s ability to perform across different market conditions. Fund overlap is more prevalent in specific categories.
Debt Fund Overlap: Not a Major Concern
For many investors, overlap between debt funds is not a concern. The universe of debt instruments is limited, and most funds invest in the same issuers.
● Coupon rates and maturity: Even when funds invest in the same bonds, the coupon rate or maturity date may differ.
● Categories like gilt, dynamic bonds, and long-term funds: These categories depend on strategies like duration management, making overlap less impactful.
Tip: To avoid duplication in debt funds, diversify your portfolio across categories or AMCs rather than focusing on overlap.
Derivative Fund Categories and Overlap
Funds in hybrid categories such as equity savings or arbitrage include derivatives, making overlap challenging to calculate. The derivative strategies in these funds—like arbitrage—determine performance more than the overlap in stocks.
Most Significant Overlap: Equity Funds
Overlap is most important for equity funds. Two equity funds with a high degree of overlap are likely to perform similarly. If these funds are in your portfolio, market corrections in overlapping stocks can increase risk.
Owning similar equity funds means you’re not genuinely diversifying, even if you hold multiple funds. This limits your ability to benefit from different market trends. Our portfolio overlap of mutual funds Tool helps you compare the overlap of 2 or 3 equity funds.
What is High Mutual Fund Overlap?
Overlap is measured by the weight of common stocks between funds, not just the number of stocks they share. A high level of overlap is typically when 60-65% or more of the portfolios are in common.
Overlap Between Different Categories
AMCs often share similar views on market opportunities, leading to overlap even between funds from different categories. For example, large-cap stocks favoured across multiple categories contribute to overlap.
How to Handle Mutual Fund Overlap
If you find a significant overlap between funds in your portfolio, you don’t need to sell immediately. Observe the funds for 3-4 months, then decide which one to keep.
●For overlaps of 55% or more or more, compare performance metrics like:
○ Volatility
○ Benchmark performance
○ Risk-adjusted returns
○ Downside protection
Consider each fund’s strategy as well. If two funds from different categories perform similarly and the overlap is significant (70-75%), it’s best to keep just one. Use performance metrics to decide which fund to eliminate.
Conclusion:
Understanding the overlap between mutual fund portfolios is crucial to maintaining a well-diversified strategy. A high overlap in your portfolio can reduce its effectiveness, especially with equity funds. Similar holdings could expose you to more significant risks during market fluctuations. Although the overlap between debt fund categories may not be as substantial due to the limited number of debt instruments available, hybrid and derivative funds should be approached with caution as their performance can be influenced more by derivative strategies.
Investors can make informed decisions by using tools such as our Mutual Fund Overlap Tool to assess the extent of their portfolio overlap. You should analyse the performance metrics of each fund, such as volatility and risk-adjusted returns if you find significant overlap, defined as 60% or higher. If there is little overlap, it may be advantageous to keep both funds if they have complementary strengths.
You can maximize your investment portfolio by actively monitoring the overlap between mutual funds in your portfolio. This will allow you to capture market opportunities and minimize risks. Regular reviews and adjustments made based on insights from overlap will lead to an investment portfolio that is more robust and resilient.