scorecardresearchInvested in too many mutual funds? Avoid overlap in portfolio through this online tool

Invested in too many mutual funds? Avoid overlap in portfolio through this online tool

Updated: 20 Dec 2022, 02:45 PM IST
TL;DR.
There is a mutual fund portfolio overlap tool launched by investment research platform PrimeInvestor. This tool helps investors to evaluate the allocation of common stocks held by a number of mutual funds.
Wealth advisors often recommend investors to hold mutual funds schemes with diverse set of stocks to comprise a diversified portfolio

Wealth advisors often recommend investors to hold mutual funds schemes with diverse set of stocks to comprise a diversified portfolio

If you have invested in multiple mutual fund schemes, then the chances are that some of these funds have overlapping constituent stocks. A few overlapping stocks should not ideally concern the investors, but when their valuation comprises a vast majority of your portfolio then it can set the alarm bells ringing.

It is, therefore, vital to first identify the extent to which these funds have overlapping stocks, and then act on it, i.e., sell one or more funds to ensure a healthy diversification in your portfolio.

And why not? After all, duplication in your portfolio can significantly impact your returns.

“It's okay to have common stocks but when they constitute chunk of your portfolio then what happens is...when these stocks fall -- your entire portfolio would fall. There are two scenarios that can arise in this. First, you wait and watch if the overlapping is small, and second is to sell some of your investments to cut down on overlapping,” Vidya Bala, co-founder of Prime Investor, shared in a video on a video streaming platform.

She highlights that by being concentrated too heavily, investors not only bear a high financial risk but also lose out on other potential stocks which could be a great investment opportunity while the stocks in your portfolio were falling.

How to identify

Identifying the fund overlap is quite simple by using the PrimeInvestor’s online tool. One can write the name of two mutual fund schemes and find the overlap percentage of two fund schemes.

For instance, HDFC Flexi Cap Fund and HDFC Top 100 Fund are shown to have 62 percent overlap. As one scrolls down, one can also find out allocation of these funds to common stocks which include Axis Bank, Airtel, BPCL and Cipla in this case.

Likewise, HDFC Flexi Cap Fund and HDFC Capital Builder Value Fund have 56 percent overlap.

One should see that 60 percent overlap is common in large cap or large cap-oriented stocks. But anything beyond that is too much, like 70 percent. It means you don’t need to keep both the funds in portfolio.

Article
This is how the online overlap tool shows the common stocks between two or more mutual fund schemes

Sometimes two funds under the same category by different AMCs carry a low overlap ratio. For example, Parag Parikh Flexi Cap and HDFC Flexi Cap have only 21.6 percent overlap.

How to rectify

Once it has been established that two or more mutual funds have a significant proportion of common stocks, one can decide which mutual funds to keep and which ones to sell. Although this seems like a tough decision to make, but one can take a call based on the current valuation and other performance indicators such as sharpe ratio, standard deviation, outperformance over benchmark, among other indicators.

It is also vital to note that the mutual fund houses tend to change their portfolio – so the overlap between different schemes is also subject to change.

So, next time you want to invest in a new mutual fund, try to remember the old adage: Don't put all your eggs in one basket.

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First Published: 20 Dec 2022, 02:45 PM IST