What Is Portfolio Overlap in Mutual Funds and Why Should Investors Care?

Diversification is often measured by the number of mutual fund schemes in a portfolio. However, the count of funds does not automatically translate into meaningful diversification. The real measure lies in the underlying securities held across those schemes.

Portfolio overlap becomes relevant in this context. When multiple funds hold the same stocks in similar proportions, exposure remains concentrated despite the presence of several schemes. Understanding this concept supports better risk control, cost efficiency, and portfolio discipline.

What Is Portfolio Overlap in Mutual Funds?

Portfolio overlap measures the percentage of identical securities held across different portfolios, indicating the degree of similarity or duplication in their underlying investments.

For example, two large-cap funds may both hold significant allocations in leading banking, IT, and energy companies. Even if the schemes are managed by different fund houses, the core exposure may remain similar. That similarity represents portfolio overlap.

The presence of some common holdings is natural, particularly in large-cap categories where top 100 companies dominate indices. The concern arises when duplication becomes excessive and unintentional.

Why Does Understanding Portfolio Overlap Matter in an Investment Strategy?

The purpose of diversification is to spread risk across sectors, companies, and themes. When holdings are repeated across funds, that objective weakens.

1. False Diversification

Holding multiple schemes may create an impression of wide diversification. However, if those schemes invest in similar stocks, the spread of risk remains limited. High portfolio overlap may potentially reduce the effectiveness of diversification.

2. Concentration Risk

When the same stock appears across several funds, its influence on the overall portfolio may increase. Positive performance may lift returns across schemes. Conversely, underperformance can affect the entire portfolio simultaneously. Concentration risk, therefore, becomes higher than initially assumed.

How Does Portfolio Overlap Occur?

In most cases, duplication happens unintentionally and results from common fund selection patterns.

1. Investment in Similar Categories

Large cap funds typically invest in a comparable universe of companies. Holding multiple funds from the same category increases the likelihood of overlapping holdings. Flexi cap funds also tend to maintain substantial large cap exposure, further raising similarity. That said, investing in similar stocks may not be a mistake. Your returns are dependent on market performance.

2. Performance-Driven Selection

Funds are often selected based on recent returns or ratings. This approach may lead to ownership of schemes with similar mandates and identical core holdings. Past performance is not necessarily indicative of future results. 

How Can Portfolio Overlap Be Measured?

1. Comparison of Holdings

Reviewing the top 10 holdings of each scheme provides an initial indication. Repeated company names across funds suggests duplication. Please note that overlap results depend heavily on the disclosure date and is not static. 

2. Percentage of Common Stocks

There is no regulator-defined ‘ideal’ overlap level for investor portfolios. Overlap tends to be higher in categories with a constrained investable universe (e.g., large-cap equity), and lower in broader universes. Overlaps around 60–70% between two equity funds can be considered as ‘very high,’ but interpretation depends on category, weights, and timeframe.

3. Sector Allocation Review

Even when stock names differ, similar sector weightage can signal comparable risk exposure. Funds heavily tilted toward banking or technology may move in similar patterns.

Regular monitoring ensures that portfolio overlap remains within acceptable limits.

Is Portfolio Overlap Always a Concern?

Overlap is not inherently negative. Context and strategy determine whether it poses a risk.

1. Situations Where Overlap May Be Acceptable

In large-cap investing, leading companies frequently appear across multiple schemes due to market capitalization and liquidity. Some degree of similarity is therefore unavoidable. If allocation weights differ meaningfully, overall portfolio behaviour may still vary.

2. Situations Where Overlap Becomes Risky

Concerns arise when duplication dominates the portfolio structure. Holding several schemes with near-identical top holdings reduces diversification and increases exposure to specific companies or sectors. In such cases, the benefits of holding multiple funds diminish.