Mutual Fund Overlap
Diversification is critical to investing. Mutual funds are diversified, so they’re attractive to investors. However, you also need to consider the overlap in your mutual fund holdings.
A portfolio with non-ideal funds can be wrong. Overlapping investments can cost you unnecessary fees, reduce the benefits of diversification, and make it illiquid if you need to sell all at once. Insufficient asset allocation can hurt your long-term returns.
Knowing the mutual fund overlap can help you make better decisions about your money, whether you’re looking to invest new or rebalance. Continue reading to learn how to identify and manage mutual fund overlap to make your portfolio more efficient.
What is a Mutual Fund Portfolio?
A portfolio is when you invest in mutual funds.
- Debt Fund: Mostly debt instruments.
- Equity Fund: Mostly equity instruments.
- Balanced Fund (Hybrid Fund): Stocks and bonds.
Mutual Fund Overlap: What is it?
Many mutual fund investors find stock holdings a problem. Mutual fund overlap is when an investor invests in multiple plans with similar portfolio holdings. Diversification is not helpful if your mutual fund portfolio has similar holdings, as this increases the chances of losing.
Mutual Fund Overlap: Impact
Mutual funds are popular among investors looking to diversify their investments as they give access to multiple markets through one product. However, investors can do better by not overlapping their holdings.
Diversification is reduced when you own the same shares in mutual funds. All funds with overlap will perform poorly if the market falls, resulting in lower returns. Duplication of effort will result in more losses.
How to Avoid Mutual Fund Overlap?
- Plan Differently
Many investors, for various reasons, add new mutual funds to their portfolios. This is a big mistake since you should never overlap funds. Make sure your investment goals match the mutual fund’s goals before investing. Also, understand the fund’s basics.
- Don’t Invest in the Same Asset Twice
When you have multiple schemes with similar goals, you will use the same strategy and invest in the same stocks. This won’t add much to your overall portfolio diversification.
If you already have a “large-cap” mutual fund and want to add another one, consider different criteria instead of “large-cap.” Many large-cap funds will invest in the same high-performing companies that make up the benchmark indexes, regardless of the Asset Management Company (AMC).
- Identify and Remove Underperformers
If a mutual fund consistently underperforms against other categories, peers, and benchmark indexes, remove it from your portfolio. Remember, a mutual fund’s short-term performance is not an indicator of its future performance.
Why is Portfolio Diversification Important for Mutual Funds?
Diversification can give you higher returns. Diversification doesn’t prevent losses but makes them less likely. For long-term investing, a diversified portfolio is a must.
A diversified portfolio ensures that one asset category’s performance won’t eat into your savings. Make sure you understand how a fund will invest before you invest. Invest in multiple funds to minimise overlap losses.
Conclusion
Mutual fund overlap management is key to building a solid portfolio. Overlapping investments will add cost, reduce diversification, and hurt your long-term returns. You can make your overall investment strategy more effective by choosing suitable mutual funds and not duplicating them.
Use a portfolio overlap checker to identify and minimise overlap in your portfolio. This tool will show you the overlap between mutual funds so you can decide which to keep and which to remove. Reduced overlap is critical to diversification. This will minimise risk and optimise returns over time.
A diversified portfolio that doesn’t overlap will help you ride out market fluctuations and achieve steady growth while meeting your financial goals. You can maintain a balanced portfolio by using a portfolio checker and managing your investments actively.
