Portfolio overlap occurs when multiple mutual funds in your portfolio hold similar stocks, reducing diversification. This hidden risk can amplify losses in volatile markets. Managing overlap is crucial. What causes it, and how can you fix it? Let’s break it down.
What Is Portfolio Overlapping?
Portfolio overlapping in India happens when funds share the same stocks, sectors, or themes. This is a common issue due to the limited number of quality stocks and the regulatory framework governing mutual funds.The SEBI mandates that funds within the same category invest in specific market capitalization segments, which can lead to overlap.
Why Does Portfolio Overlap Happen?
- SEBI’s Category-Wise Mandate: Until 2018, there was no specific definition of where a fund of a specific category could invest. This led to funds with large-cap in their name investing a part of their assets in small-cap stocks. In 2018, SEBI stepped in and recategorized the investment universe from which different funds could pick stocks.
- AMC-Specific Investment Style: AMCs often have a unique investment philosophy and approach. This can lead to overlap among funds managed by the same AMC, even if they belong to different categories. For instance, Axis Mutual Fund follows a growth and quality style of investing, which is reflected across its funds, leading to significant overlap.
How to Identify and Reduce Overlap:
To tackle portfolio overlapping, use tools like Morningstar or fund house reports to check holdings. Calculate overlap by comparing top 10 holdings or sector weights. For instance, two funds with 40% in banks signal redundancy. Diversify across fund categories—mix large-cap, flexi-cap, or debt funds. In 2024, 10.23 crore SIP accounts showed diversified investing. Moreover, limit funds to 4-6 per portfolio and avoid same-AMC schemes, as they often share strategies.
Strategies to Manage Portfolio Overlap:
- Regular Portfolio Review: Investors should periodically review their portfolio to identify overlap holdings. This review helps in understanding the true exposure to specific stocks or sectors and also making necessary adjustments.
- Diversify Across AMCs: Investing in funds from different AMCs can reduce overlap, as each AMC may have a unique investment philosophy and stock selection process. This diversification also ensures a broader range of holdings and reduces concentration risk.
- Utilize Online Tools: Several online platforms offer tools to check mutual fund overlap. These tools thus allow investors to input their fund holdings and analyze common stocks, aiding in better portfolio management.
Conclusion:
In conclusion, portfolio overlapping in India can derail diversification, but careful fund selection minimizes risks. By implementing the strategies mentioned above, investors can build a more resilient and efficient portfolio. Ready to streamline your investments? Explore more insights now!
– Ketaki Dandekar (Team Arthology)
Read more about Portfolio Overlapping here – https://www.bajajfinserv.in/mutual-fund-overlap