What is fund overlap? Why 5 funds may act like 1

Many people think: "More funds, more safety." That is not always true. If your funds buy the same companies, you are holding the same basket again and again.

Fund overlap is when two or more of your funds hold the same shares.

A simple picture

Say you hold three funds, and each says "large cap" in its name. All three buy the biggest companies in India. Many of the same names appear in all three.

You put ₹5,000 a month in each, so ₹15,000 a month. But because the funds are so alike, it may work more like ₹15,000 in one fund. When those big companies fall, all three funds fall together.

How to measure overlap: easy maths

For every company that both funds hold, take the smaller weight. Then add them up.

Weight means what share of the fund sits in that company. Here are example weights.

Overlap = 9 + 8 + 5 + 5 = 27%, just from these six names. If the rest of the funds also match, the overlap grows.

A rough reading (many people use something like this, but there is no official rule):

• Below 30%: the funds are quite different.
• 30% to 60%: some doubling up.
• Above 60%: they are close to twins. Ask why you need both.

Why does overlap matter?

1. Hidden concentration. One company may be 6% of three different funds. Your real exposure to it is much bigger than you think.
2. Less true spread. Five funds with the same shares do not spread risk much.
3. Paying twice. Each fund charges a yearly fee, so you pay more for the same thing.
4. Hard to track. More funds means more to check, more to sell and more to do at tax time.

When overlap is fine

Some overlap is normal. All large-cap funds will hold some big banks. An index fund and a flexi cap fund will share names too. The problem is a large overlap with no reason behind it.

Two different fund kinds usually overlap less. For example, a large-cap fund and a small-cap fund share few names. A debt fund has almost no shares in common with an equity fund. That is also how you mix asset classes.

How to check your own funds

1. Write your funds in a list, with the category of each.
2. Look for repeats of the same category, such as three large-cap funds.
3. Use a free overlap tool. Several fund websites and apps show the common shares of two or more funds. Your mutual fund distributor can also share one.
4. Ask one question for each fund: "What job does this fund do that no other fund of mine does?" If you have no answer, it may be a repeat.

A tidy example

Before: 5 funds, ₹25,000 a month, with 3 of them all large cap.

After a review, someone might think of 3 funds that each do a different job: a broad equity fund, a mid or small cap fund, and a debt fund. Fewer funds, clearer jobs, easier to follow. Whether this fits you depends on your goal and your risk comfort.

What to remember

1. Number of funds is not the same as spread of risk.
2. Overlap = add the smaller weight of each common company.
3. Give every fund its own job. If two do the same job, one may be enough.

Mutual fund investments are subject to market risks, read all scheme related documents carefully. All numbers here are examples. This post is for education only and is not investment advice.