Owning a large number of mutual funds often leads to portfolio overlap, where different schemes hold the same stocks. This strategy defeats the purpose of diversification and can hurt your long-term risk-adjusted returns. Investors should focus on the quality of unique exposure rather than the total count of funds in their portfolio.
Many Indian retail investors mistakenly believe that buying more mutual fund schemes leads to better diversification. In reality, with nearly 2,000 schemes currently available in the Indian market, simply adding funds to your portfolio often creates significant overlap. This occurs when multiple funds, regardless of their labels like large-cap, mid-cap, or flexi-cap, end up investing in the same set of market leaders or sectors. When your funds hold identical stocks, they essentially move together, meaning your portfolio does not benefit from the reduced risk that diversification is supposed to provide.
Why Different Fund Categories May Share Holdings
The structure of the Indian mutual fund industry means that many fund managers, particularly in the large-cap and flexi-cap categories, follow similar benchmarks like the Nifty 50 or Nifty 500. Because these indices are dominated by a handful of large companies, different fund managers often hold the same top-weighted stocks to remain competitive. Consequently, holding a large-cap fund and a flexi-cap fund from different fund houses might result in a high percentage of shared holdings. This creates an illusion of having a diverse investment strategy when, in practice, the underlying exposure remains concentrated in the same few companies.
Is More Always Better?
Financial experts emphasize that true diversification comes from owning assets that behave differently, not from collecting numerous fund account statements. Most actively managed diversified equity funds already hold between 40 and 100 individual stocks. When an investor owns 10 or 15 different funds, the portfolio could easily hold hundreds of overlapping positions. This excess clutter makes it difficult to track performance and complicates rebalancing during market volatility. Generally, a portfolio of 4 to 6 well-chosen funds is often sufficient for most investors to gain exposure across different market segments without unnecessary duplication.
Managing Your Portfolio Overlap
If you discover that your portfolio has high overlap, you do not need to rush into selling your units, as this can trigger unnecessary capital gains taxes and exit loads. Instead, take a structured approach to reviewing your holdings. Evaluate whether each fund provides a unique role, such as exposure to small-cap stocks, international markets, or debt instruments, rather than just equity-heavy funds. If you decide to consolidate, a more efficient way is to stop new Systematic Investment Plans (SIPs) in the overlapping funds and redirect that capital into your preferred, core holdings. This gradual approach allows you to clean up your portfolio without incurring immediate tax penalties while ensuring your investments are more focused on long-term wealth creation.