Mutual Fund Overlap: How to Evaluate Mutual Fund Overlap in Your Portfolio?

Mutual Fund Overlap: Overview

Mutual funds are recognized for diversification, which is the key to successful investing. While it’s tempting to focus on performance and opt for funds that have performed well in the past, it’s also vital to consider overlap among your various mutual fund holdings.

Non-ideal fund overlap can harm an investor’s portfolio; overlapping investments may cause you to pay unnecessary expenses, lower the potential benefits of diversification and reduce liquidity if you need to sell all of your shares at once. The result is suboptimal asset allocation, which can affect your investment returns in the long term.

If you're exploring potential new investments or thinking about rebalancing your portfolio, understanding any existing mutual fund overlap is an important first step in making informed financial decisions. Read on for more information about identifying and managing mutual fund overlap to increase your portfolio's efficiency.

What is Mutual Fund Portfolio?

When you invest in a mutual fund, you build a portfolio of stocks, bonds, and other financial instruments. There are equity funds, debt funds, and balanced funds. A debt fund is a portfolio mainly made up of debt instruments. A fund is called an equity fund if most of its assets are invested in equity instruments. But a balanced or hybrid fund is a mutual fund that invests in both stocks and bonds.

What is Mutual Fund Overlap?

Stock holdings are annoying for many investors in mutual funds. Mutual fund overlap happens when a mutual fund investor puts money into multiple plans where the actual portfolio holdings are very similar. Diversification may not be worth it if you invest in mutual funds with similar holdings, which makes it more likely that your portfolio will lose money.

Mutual Fund Portfolio Overlap Example

To show this, let's say you want to put money into both Fund ABC and Fund XYZ. Looking at their portfolio holdings, you can see that Fund ABC has invested in three companies: Infosys, TCS, and SBI. Fund XYZ has also invested in three companies: Infosys, TCS, and Reliance.

There is a lot of fund overlap between these portfolios, which is a problem. Both of the funds own shares of Infosys and TCS. Both of these groups of money have bought common stocks. 

It's not suitable for an investor to have a lot of fund overlap between the rings.

Effects of Mutual Fund Overlap

Mutual funds are a common choice for investors looking to spread their money around. The investor needs just one product to get entry to all marketplaces.

If investors don't overlap their holdings, which is a common mistake, they may do better.

The value of diversity decreases when an investor has identical shares in several mutual funds. If the market falls, all funds with large holdings in mutual fund overlaps would probably perform poorly. The investment is likely to suffer as a result of this. As a result, losses can go up because of duplication of efforts.

Tools to Calculate Mutual Fund Overlap

There are many ways to determine if two or more mutual funds overlap. Some of them that stand out are-

Advisorkhoj.com

Advisorkhoj.com is one of the most popular websites in the world and a top mutual fund overlap screener.  It gives information about companies that are traded a lot and companies that aren't traded as much, as well as the percentages held and other information that may be useful for fund overlap checks. Even though the website has a lot of useful features, one thing it doesn't do is let users compare different cross-category methods. 

Thefundo.com

Thefundo.com is another tool for figuring out when two mutual funds overlap. Another common way to invest money. But besides that, it's easy to use. As already said, comparing portfolios from different asset classes makes it possible. You'll be taken to a page where you can compare and contrast many AMCs or schemes. It gives you a simple way to think about your mutual fund.

How to Avoid Mutual Fund Overlap?

Plan Something Different

For whatever reason, many investors add new MF schemes to their overall portfolios. Since you should avoid fund overlapping at any cost, this is a big worry. Before investing money into a mutual fund, you should ensure that your goals match those of the fund and also analyse the fundamentals of the mutual fund.

Stop Investing in The Same Thing Twice

When you have multiple schemes with similar goals, you are more likely to invest in the same stocks using the same strategies. So, it won't add much to the volume of the portfolio as a whole.

If you already have a "large cap" fund in your portfolio and need to invest in a different mutual fund, you may want to use a different set of criteria than "large cap." Many large-cap funds invest in the same group of high-performing companies that make up the benchmark indices, no matter what their AMC is. 

Identify and Eliminate Poor Performers

In a mutual fund scheme, the underperformers should be thrown out if their performance consistently lags behind that of other categories, peers, and the benchmark index. It's important to remember that a mutual fund's short-term performance may not be a good indicator of its long-term success and that past performance is no guarantee of future results.

Why is Portfolio Diversification Important for Mutual Funds?

Diversifying your portfolio can help you make more money from your investments. Spreading investment money across many different types of assets can lower risk. Diversification can't guarantee losses won't happen, but it can make them less likely. A diversified portfolio is needed for long-term investments. Investors can reduce their exposure to market risk and make their portfolios more stable by spreading their bets across more assets. With a well-diversified portfolio, you can be sure that the poor performance of a single asset category won't hurt your savings too much. Before putting money into a fund, it's important to understand how it plans to invest fully. It's smart to put your money into several different funds. If you overlap, the losses will be even worse.

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Conclusion

Financial portfolios are spread out so investors can get the most money back while taking the least risk. But you should never forget to watch for mutual fund overlap. When investors buy mutual funds that overlap, they don't have a diverse portfolio to protect them from market changes. On top of that, it makes any losses you have worse. You should only invest in mutual funds whose plans fit your overall asset allocation strategy and help you reach your financial goals.