Does Your Mutual Fund Investments Overlaps? Here’s What you Should do - MySIPonline
Oct 12, 2017 4 min read

Does Your Mutual Fund Investments Overlaps? Here’s What you Should do!

Overlapping in investments is killing the power of diversification! Don’t let it happen.
Most of the investors don't even know about the overlapping of funds, and unknowingly they are suffering the losses from it. But, you won’t be the one after reading this blog which serves you complete detail about fund overlap, the procedure to detect it and eliminate it.

What is Overlapping of Funds?

Mutual fund investment overlaps when the investor holds two or more than two schemes that have the same objectives and targeting the stocks of same market or holdings. For instance, you have two mobile phones, and both are entirely same in terms of brand, color, features, etc. Do you really think it’s cool? Having completely identical products don't make any additional value in spite of just its presence and expenses of its maintenance. Similarly, when you invest in the mutual funds which have identical holdings or portfolio allocation, you do not gain any additional value on your investments, and also the similar holdings eat up the power of diversification in your portfolio.

In the simplest term, the overlapping in the mutual fund means the common stocks or holdings in the investments. Of course, no one will knowingly invest twice in the same stock but, unknowingly in mutual funds, many investors are deploying their money in the schemes that have similar holdings. It entirely impacts on the diversification, and in case of any downturns, it affects more on the overall value of the portfolio.

The diagram below shows two different cases depicting the overlapping investment, i.e., Portfolio A, and diversified investment, i.e., Portfolio B:

the overlapping investment

If you have invested in two stock funds and both of them are holding almost the stock of the same companies in their portfolio, then your investment portfolio will tend to lose the power of diversification. Moreover, during down-market phases, the value of both the scheme turns lower which will further cost you double losses. On the other hand, in the diagram, the Portfolio B shows the correct choice of two different funds. It shows that an adequate overlapping between the funds’ holdings is acceptable. But, too much of an intersection as in the Portfolio A may lead to danger.

Know How to Detect and Eliminate the Fund Overlapping:

There are many technical and non-technical ways of identifying the investment overlapping. We will tell you the both so that you can quickly detect the same. Let’s first understand one by one:-

Technical Methods : In technical methods, you can use various quantitative tools to find out the common investments of two stock funds. By using correlation regression, or R-squared you can determine that if there is any intersection between the two investments. For correlation regression analysis, you need to examine the regression chart of both the investments. If the diagram for both the investments depicts similar pictures, it means that both funds have similarities in their investments. On the other hand, using R-squared also, you can determine the overlapping of the funds. An R-squared of 100 means that all the movements of the scheme are in similar to the movements in the benchmark index. Therefore, if you have a scheme of S&P 5oo Index, then make sure that the other fund in your portfolio does not have an R-squared that is too close to 100. It indicates the level of fund overlap that causes both the schemes to perform similarly and reduces diversification.

Non-Technical Methods : Not a matter of nervousness if you do not have good hands in mathematical work. There are easy ways too which help you determine the investment overlapping and are completely non-technical. Let’s know what they are:

  1. To avoid categorical overlapping, you need to check your investment portfolio whether it holds any similar category of funds. It is one of the most easiest ways to detect the fund overlap. Don’t invest in more than one large-cap plan, one mid-cap, small-cap, bond fund, etc. If you do not invest in more than one fund of similar categories, then the issue of overlapping will automatically be resolved.
  2. If you have investments in multiple funds of the same category, then you need to access a check upon their holdings. There are two levels of checks to know the results:
    • Sectoral Overlapping: Make sure that both the schemes have investments in different sectors. However, it is not possible to find plans of the same category which have held entirely different sectors, but you can find some with the least similarities. Having minimum sectoral overlapping allows more diversification in the investment.
    • Holdings Overlapping: A detailed check on all the stock holdings of the schemes helps you to identify the fund overlap. If you find that the majority of the stocks are common in both the funds, then you need to change one of the less required scheme to avoid overlapping.

Henceforth, if your investments are overlapping to a higher limit then it is better to switch to the one matching the same requirement with the least overlapping. Diversification is one of the essential elements for success in mutual fund investments, but overlap kills it. Don’t let it happen! We are always there to serve you the best. Keep reading our daily blogs to gain more knowledge about mutual fund investments.

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