Mutual Fund Overlap: How to Check It and What to Do

Mutual fund overlap is the share of two funds' portfolios that sits in the same stocks. It is the most common reason a portfolio with twelve funds behaves like a portfolio with four: the names differ, the holdings do not. This guide shows where overlap comes from, how to measure it with nothing more than two factsheets, what level is worth acting on, and how to consolidate without triggering tax you did not plan for.

Why mutual funds overlap

SEBI's scheme categorisation rules define the universe each category may buy from. A large-cap fund must keep at least 80% of its assets in the top 100 companies by market capitalisation. There are only a hundred such companies, and fund managers tend to agree on the thirty or forty worth owning, so two large-cap funds from different fund houses routinely share most of their top holdings. Index funds and ETFs tracking the Nifty 50 overlap with every large-cap fund by design.

Flexi-cap and multi-cap funds may go anywhere, but their largest positions are usually the same large companies, so a flexi-cap fund often overlaps heavily with the large-cap fund sitting next to it. Even a large & mid-cap fund (at least 35% in each) carries a large-cap core that repeats what you already hold.

Overlap is not a flaw in any one fund. It is a feature of the market: a handful of companies dominate the index, and most equity funds own them.

How to check overlap between two mutual funds

You need each fund's latest factsheet, published monthly on the fund house's website and on AMFI's portal.

1. List the top ten holdings of each fund with their weights.
2. Mark the names that appear in both lists.
3. Add up the smaller weight for each shared name. If Fund A holds 8% in a company and Fund B holds 5%, the overlap from that company is 5%.
4. The total is the top-ten overlap. Two funds sharing six names with a total of 30% are doing largely the same job in their core.

The full-portfolio figure (every holding, not just the top ten) is what free overlap tools on the web compute, and it is usually higher than the top-ten figure. The top-ten check is enough to decide whether a fund has a reason to exist in your portfolio; the exact percentage matters less than the pattern.

While you have the factsheets open, compare two more things: the sector weights (two funds can hold different stocks and still both be 35% in banks) and the benchmark. Funds benchmarked to the same index are overlapping by construction.

How much overlap is too much?

There is no rule in the regulations, so use the question the overlap is answering: does the second fund add anything the first does not?

• Under 30% on the top ten: the funds are doing different jobs. Keep both if each maps to a goal.
• 30% to 50%: the funds are cousins. Keep both only if you can say what the second one adds (a different style, a different market-cap tilt, a manager you want alongside an index fund).
• Over 50%: you are paying two expense ratios for one exposure. Pick one.

The same test applies to a fund and an index: an active large-cap fund whose top ten matches the Nifty 50's top ten is charging an active fee for index exposure.

Overlap is not the same as diversification

Diversification is owning things that behave differently: large and small companies, equity and debt, India and the rest of the world, gold. Adding a fifth equity fund that holds the same thirty companies adds paperwork, not diversification. A simple equity portfolio that is hard to overlap is one broad fund per job: one large-cap or index fund, one mid or small-cap fund if the goal is far enough away, and perhaps one international fund. The asset allocation calculator shows how the equity share itself should fall as a goal approaches, which matters more than the number of funds inside it.

How to fix overlap without a tax surprise

Consolidating means selling one fund and moving the money into another, and selling is a taxable event.

• Check the exit load. Most equity funds charge a load if you sell within a year of each purchase. SIP instalments are each a separate purchase with their own date.
• Check the gain. Long-term capital gains on equity funds are taxed above a yearly exemption; selling a large holding in one go can cross it. Spreading sales across two financial years, or selling the units with the smallest gains first, keeps the bill down. Confirm the current rates and exemption for the financial year before you sell.
• Stop the SIP first, sell later. Redirecting the SIP into the fund you are keeping fixes the overlap going forward at no cost; the existing units can be moved when the load period and the tax year make sense.
• Do not consolidate into the fund that did best last year. Keep the fund that fits the job: the lower cost for an index exposure, the manager with the longer record for an active one.

Read when to consider selling a mutual fund before any sale, and see how to pick an equity mutual fund for choosing the one to keep.

Overlap as part of a yearly review

Overlap is check number three in our mutual fund portfolio review checklist; goal fit and asset mix come first, because a fund that has no goal does not need an overlap test. If you would rather have the whole review done for you, Sanriya's free portfolio review reports overlap, cost drag, risk fit and goal gaps from your consolidated statement. Sanriya Finvest Pvt. Ltd., Pune, is an AMFI-registered mutual fund distributor (ARN-193359); we distribute Regular plans and are paid trail commission by the fund house, so there is no fee for the review, and the decisions stay with you. Mutual fund investments are subject to market risks; read all scheme related documents carefully.