Investing in multiple mutual fund schemes is one way to spread your money across different investments. But sometimes, different funds may hold many of the same stocks, which means your portfolio may not be as diversified as it appears. So, how can you tell if your funds are adding variety to your investments or simply repeating the same holdings? Let's understand this with a simple example.
10 Funds, But The Same Stocks?
Imagine Rahul, an IT professional, who invests Rs 5 lakh across 10 mutual fund schemes, putting Rs 50,000 into each. At first glance, his portfolio may seem well diversified.
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However, three of his funds are large-cap schemes, two are flexi-cap funds, two are focused funds, and the remaining three have similar exposure to the same segment of the equity market.
Several of these schemes may hold the same stocks, such as HDFC Bank, ICICI Bank and Reliance Industries. This means that despite owning 10 different funds, a significant part of Rahul's money may depend on the performance of the same companies.
If these stocks fall sharply, multiple funds in his portfolio could lose value at the same time. This is known as portfolio overlap, and it can reduce the benefits of diversification.
How Can You Check Your Portfolio?
Instead of focusing on the number of schemes you own, ask yourself three questions:
Do my funds invest in the same stocks? Check the latest portfolio disclosures of your mutual funds to identify overlapping holdings. Several online investment platforms also offer tools to compare the stocks held by different schemes.
Am I investing across different categories? Large-cap, mid-cap and debt funds can provide exposure to different parts of the market, although their actual holdings and risk profiles still matter.
Does every fund serve a clear purpose? Each scheme should have a specific role in your portfolio. Adding another fund without understanding what it brings to your investments may only increase complexity.
A portfolio of five carefully selected mutual funds may offer better diversification than one holding 10 schemes with similar investments. Before adding another fund, review your existing holdings, check for overlap and assess how each scheme fits your financial goals.
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