Wealth Co., FundsIndia Warn on Fund Overlap Risk
The Wealth Company's Debasish Mohanty and FundsIndia's Jiral Mehta explain how common holdings can create unintended concentration for investors.
Understanding Portfolio Overlap
Mutual fund portfolio overlap is a natural occurrence, particularly when schemes operate within similar market segments or draw from comparable investment universes. This commonality does not inherently signal a problem, according to Debasish Mohanty, MD & Chief Strategy Officer at The Wealth Company Mutual Fund.
He notes that while holding multiple funds often implies diversification, a significant overlap can lead to unintended concentration in specific underlying assets. The concern arises when schemes offer substantially similar exposure without genuinely expanding an investor's diversification.
Assessing Concentration Risk
The critical factor in portfolio overlap is the extent to which common holdings influence the overall investment mix. Mohanty explains that if identical companies or sectors form a large part of several funds, a downturn in those assets would simultaneously affect multiple mutual fund positions.
The sheer number of funds an investor holds, therefore, may not accurately reflect the true level of diversification. There is no universal percentage at which overlap automatically becomes a warning sign; instead, investors must consider the fund categories, the available investment universe, and each scheme's weight within their total portfolio.
Practical Limits and Tools
Jiral Mehta, Senior Manager - Research at FundsIndia, suggests a practical limit, advising investors to cap portfolio overlap at 40% to manage risk. He also recommends utilising online mutual fund overlap tools to pinpoint common holdings across schemes.
Overlap frequently occurs when funds, despite different mandates, share significant exposure to large companies, such as large-cap, flexi-cap, and large-and-mid-cap funds. Similarly, actively managed funds and index funds can hold many of the same prominent stocks, challenging assumptions that different categories automatically ensure distinct portfolios.
For Asian investors building multi-fund portfolios, understanding overlap is crucial for genuine diversification. High commonality does not mean funds are identical; differences in proportion, sector allocation, market-cap exposure, investment style, and risk characteristics still matter.
Mohanty stresses that investors should assess what each fund contributes to their overall portfolio strategy. A consolidated view of all holdings reveals true exposure to stocks, sectors, and investment styles, ensuring the portfolio aligns with intended diversification goals across Asia's varied markets.
This article is journalism, not investment advice; consult a licensed professional before making financial decisions. Market data is indicative, may be delayed, and should be verified with your broker or exchange before use.
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