For successful investing in mutual funds, diversification remains an essential strategy, which is undertaken to minimise the risk of an investment. However, diversification is likely to take a hit if similar stocks are held in multiple mutual fund schemes.
This is referred to as a mutual fund portfolio overlap, which may occur when two or more different fund schemes hold the same stocks in their portfolio.
For instance, let’s say, an individual invests in an XYZ mutual fund, which has a fund composition that includes shares of a company ABC.
To diversify the portfolio, the individual invests in some other mutual fund schemes. However, this fund has invested in the same company, that is, ABC as part of the overall investment strategy. This is how the overlap of mutual funds takes place.
A way to avoid overlapping is to avoid investing in too many fund schemes of a similar category.
Also, check exposure to different sectors and industries and in case an investor discovers that the net allocation towards a particular sector is quite high, there is a need to relook into investment weightage.
Besides, refrain from adding multiple funds managed by the same fund managers. This is because funds managed by a single manager are likely to have a common investment style and strategy.
Ideally, an investor should park their money across different fund categories such as gold, energy, etc. Also, they should take into account that their fund allocation is aligned with their financial goals, investment horizon and risk appetite.
Also, technology has added convenience when it comes to avoiding overlapping of portfolios. There are various aggregator websites where an investor has to key in the name of a fund scheme and can get information on other funds with the same portfolio holdings.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.
