How to Avoid a Portfolio Overlap When Investing in Mutual Funds

If you are holding too many schemes, it is advisable to review your mutual fund portfolio so that you can take corrective measures to earn optimal returns. More on this later, but first let's see how mutual fund overlap can hurt your returns...

A high mutual fund portfolio overlap is counterproductive to diversification - some schemes may just occupy space in the portfolio without adding any real benefit or value. Furthermore, it exposes your portfolio to concentration risk leading to polarised returns as it will be skewed towards a particular set of stocks, sectors, market cap, or investment styles. Moreover, it increases the burden of monitoring and makes portfolio review/rebalancing difficult.

So how many mutual fund schemes should you own in your portfolio to avoid overlap?

Investment in mutual funds should be done as per your risk profile, investment horizon, and financial goals, and not in an ad hoc manner. Ideally, you should own a maximum of 5-8 mutual fund schemes across categories (including equity, debt, and others). For instance, if you are an investor with a moderate risk profile investing a modest amount, you can consider adding one scheme each from Large Cap Fund, Flexi Cap Fund, and Aggressive Hybrid Fund categories.

[Read: Best Mutual Funds to Invest in Right Now]

You can add more schemes within the same category only if they follow distinct investment styles or strategies. It also makes sense to invest in two or more schemes within a category if you have a large investible corpus and are thus wary of putting in all the money in one scheme/fund house.

Review your portfolio to avoid overlapping schemes

As an investor, you need to conduct a comprehensive mutual fund portfolio review to be able to see if the overlap is not too high and eliminate underperforming schemes so that you can comfortably achieve your financial goals.

If you find that you are holding too many mutual fund schemes and are worried about portfolio overlap, here is how you can optimise your portfolio:

• If you have added multiple schemes within the same category, eliminate the one that has consistently underperformed its benchmark and the category average over longer time frames.

• Eliminate those schemes that do not align with your financial objectives and in turn add to the risk element of your portfolio.

• Reduce the number of schemes from the same fund house/fund manager as they are likely to follow similar investment styles/strategies across schemes.

• Avoid adding more than 1-2 schemes from the same category because schemes within a particular category usually invest in a common set of stocks.

• Avoid adding a mutual fund scheme to your portfolio just because a friend/relative/colleague has recommended it or because you find the sales pitch of a scheme interesting.

Here are five key benefits of a Mutual Fund Portfolio Review:

If you need professional help in consolidating or reviewing your portfolio, sign up for  PersonalFN's Mutual Fund Portfolio Review Service, a personalised portfolio review service designed to boost the returns of mutual fund investors.

It reviews your existing mutual fund portfolio, helps you correct your past investment mistakes, and suggests possibly the best options more suitable for you.

Through this service we will recommend which funds to redeem immediately and which ones to hold on to and buy - with proper reasons for the recommendations - and how you must allocate the money that you receive from selling the non-performing funds.

To get your mutual fund portfolio reviewed by PersonalFN's experts just fill in a small form which will help us get back to you.

Our fund experts will then get in touch with you with their questions. Once done with that, our experts will ask you to share with them your portfolio (our team will explain you how to do it). Our experts will then perform an in-depth study of your portfolio and revert with their opinion within the next 15 working days (or earlier) in a 'special customised report'.

Subscribe to PersonalFN's Mutual Fund Portfolio Review Service now to discard the non-performing mutual funds and select the right funds that aligns with your financial goals and objectives.

Here is a glimpse of what you get when you sign up for the PersonalFN Mutual Fund Portfolio Review service...

You can have a look at the sample report for the Mutual Fund Portfolio Review service here.

To conclude...

No matter how cautiously you choose your investments, there is no assurance of future performance, as changes in the market and economic outlook influence your portfolio performance. Notably, your personal and financial circumstances can also undergo changes over a period. Therefore, it is essential to review your portfolio periodically at suitable intervals, preferably semi-annually or annually, or whenever there are changes in your asset allocation plan and risk profile.

[Read: 5 Simple Steps to Perform a Mid-year Portfolio Review]

Reviewing your portfolio is important to help you achieve your financial goals. As you grow older, life events and personal factors may change your ability and comfort to tolerate risk. Accordingly, your investment strategy will also warrant changes from time to time.

Therefore, just like a regular health check-up, a periodic investment portfolio review can be just as useful. Ensure that the investment decisions to Buy, Hold, and Sell the schemes in your portfolio are rational, scientific, and unbiased based on thorough research and analysis.

Warm Regards,
Divya Grover
Research Analyst