Mutual Fund Overlap: Are Your 5 Mutual Funds Really Diversified?

Are Your 5 Mutual Funds Actually Diversified?

You have five mutual fund SIPs running every month. Different fund names, different AMCs and different fund managers.

You probably believe your money is well diversified.

But what if all five funds own many of the same companies?

You may be investing in five different mutual funds but taking almost the same investment exposure.

This is called Mutual Fund Overlap.

Let's understand why it happens, how to identify it and what you should check before adding another mutual fund to your portfolio. To see how diversification works at the portfolio level, you can also read our guide on asset allocation.

1. What Is Mutual Fund Overlap?

Mutual fund overlap occurs when two or more mutual fund schemes invest in the same stocks or securities.

For example:

Although these are two different schemes, both invest in the same companies.

If you own both funds, you have repeated exposure to these businesses.

Remember: Diversification depends on what your funds own, not how many funds you hold.

2. Why Do Different Mutual Funds Hold the Same Stocks?

There are four common reasons:

• Similar market segments: Large-Cap Funds often invest in the same leading companies.
• Overlapping categories: Flexi-Cap and Focused Funds may also have significant Large-Cap exposure.
• Similar investment strategies: Different fund managers may independently select the same quality businesses.
• Chasing recent performance: Investors often add funds based on returns without checking their existing holdings.

This is why having five or six mutual funds does not automatically make your portfolio diversified. Understanding how large cap, mid cap and small cap funds differ can help you spot funds that are too alike.

3. How Much of Your Portfolio Is Actually Invested in the Same Companies?

Let's take a simple example.

Suppose you invest ₹20,000 each in five mutual funds, making your total investment ₹1 lakh.

Assume each fund represents 20% of your portfolio.

Now, let's calculate your combined exposure to HDFC Bank.

Since each fund represents 20% of your portfolio, your combined HDFC Bank exposure is:

20% × (8% + 6% + 10% + 4% + 8%) = 7.2%

YOUR TOTAL HDFC BANK EXPOSURE: ₹7,200

7.2% of your ₹1 lakh portfolio

This is how you should look at your investments: not fund by fund, but as one combined portfolio.

Note: This is a hypothetical example, not actual mutual fund portfolio data.

4. Is Mutual Fund Overlap Always Bad?

No. Some overlap is perfectly normal.

For example, a Nifty 50 Index Fund and an actively managed Large-Cap Fund may naturally own many of the same companies.

The problem arises when multiple schemes provide almost identical exposure without adding meaningful diversification.

Also, two funds may have different stock holdings but still carry similar risks because they invest in the same sectors or market-cap segments.

Therefore, a good portfolio review should examine:

• Common company holdings.
• Sector exposure.
• Large-Cap, Mid-Cap and Small-Cap allocation.
• Investment strategy and risk.

The objective is not to eliminate every common stock. It is to ensure that each fund has a meaningful role in your portfolio.

5. How Can You Check Mutual Fund Overlap?

You can start with these five simple steps:

1. List all your existing mutual fund schemes.
2. Download their latest portfolio disclosures from AMC websites.
3. Identify companies appearing in multiple funds.
4. Calculate your combined exposure to those companies based on how much you have invested in each fund.
5. Review your overall sector and market-cap allocation.

You can also use online mutual fund overlap calculators. Check the date of the portfolio data and the calculation methodology before relying on the results. iArista's Financial X-Ray can also help you look at your investments together.

6. What Has SEBI Changed Regarding Mutual Fund Overlap in 2026?

SEBI introduced specific portfolio overlap requirements through its circular dated 26 February 2026.

Some important provisions include:

• Value and Contra Funds: The overlap between the two schemes offered by an AMC cannot exceed 50%.
• Sectoral and Thematic Funds: A 50% overlap limit applies to comparisons with specified equity scheme categories, with Large-Cap schemes excluded from this comparison.
• Quarterly monitoring: Compliance is assessed using the average of daily overlap values during a quarter.
• Monthly disclosures: AMCs are required to publish category-wise portfolio overlap disclosures on their websites.
• Existing schemes: Existing Sectoral and Thematic schemes have three years from the circular date to comply with the prescribed limits.

Important: These are regulatory requirements applicable to mutual fund schemes and AMCs. They are not a blanket 50% overlap limit on an individual investor's personal portfolio.

For details, refer to the SEBI circular dated 26 February 2026.

7. What Should You Do If Your Funds Have High Overlap?

Finding overlap does not mean you should immediately sell your mutual funds.

Before making changes, consider:

• Does each fund have a distinct investment objective?
• Are you overexposed to particular companies or sectors?
• Are multiple funds providing almost the same investment exposure?
• What are the applicable exit loads and capital gains taxes?
• Does your portfolio match your financial goals and risk profile?

Sometimes, a portfolio may need restructuring. In other situations, the existing funds may still have a valid role.

The decision should be based on your complete financial situation, not just one overlap percentage.

Frequently Asked Questions

1. Is investing in five mutual funds better than investing in two?

Not necessarily. The number of schemes does not determine diversification. Their underlying holdings and investment strategies matter more.

2. How much mutual fund overlap is acceptable?

There is no universal acceptable percentage. It depends on the funds, their objectives and your overall portfolio.

3. Does high mutual fund overlap increase risk?

It can increase concentration in certain companies or sectors, making multiple schemes vulnerable to similar market movements.

4. Should I sell mutual funds with high overlap?

Not automatically. Evaluate the role of each fund, its performance, risk, costs, tax implications and contribution to your portfolio before making changes.

5. Does SEBI's 50% overlap rule apply to individual investors?

No. The prescribed limits apply to specific relationships between mutual fund schemes. They do not restrict the overlap in an individual's personal portfolio.

Before You Add Another Mutual Fund, Understand What You Already Own

Having five or six mutual funds does not automatically mean you have a diversified portfolio.

Sometimes, adding another fund may simply increase your exposure to companies you already own.

What matters is understanding how your investments work together.

At iArista Artha, we believe an informed investment decision starts with understanding your existing portfolio.

Our Financial X-Ray can help you take a closer look at your financial position and identify areas that may need attention.

Before starting another SIP, ask yourself: Am I adding genuine diversification, or simply adding another mutual fund?

Explore iArista Artha's services or connect with our team to understand your portfolio better.

Disclaimer: This article is for educational purposes only and should not be considered investment advice. Mutual fund investments are subject to market risks. Please read all scheme-related documents carefully before investing.

iArista Artha Private Limited | AMFI Registered Mutual Fund Distributor | ARN-116864