What is portfolio overlap in MF and how to reduce it?

08 Jan, 20245 mins read
What is portfolio overlap in MF and how to reduce it?


Definition of portfolio overlap:

Portfolio overlap refers to the extent to which different investments within a portfolio share common holdings or characteristics. In simpler terms, it's a measure of how much your investments overlap or duplicate each other. If two or more assets in your portfolio have similar underlying components, industries, or risk factors, there's a higher degree of overlap. Minimizing overlap can help achieve better diversification, reducing the overall risk in your investment portfolio.

Importance of managing portfolio overlap:

  • Diversification: Achieving true diversification by exposing the portfolio to various asset classes and reducing the impact of poor performance in specific areas.
  • Risk Reduction: Mitigating the risk of higher volatility caused by overlapping investments reacting similarly to market changes or economic events.
  • Enhanced Performance: Potentially improving portfolio performance by reducing overlap and capturing gains from different sectors or asset classes.
  • Asset Allocation Optimization: Aligning investments more accurately with overall asset allocation goals for effective portfolio management.
  • Avoiding Concentration Risk: Preventing exposure to concentration risk in specific industries or sectors that could lead to significant losses during downturns.
  • Flexibility and Adaptability: Providing flexibility to make strategic changes in the portfolio without doubling down on specific assets or risks.

Understanding Portfolio Overlap

Explanation of portfolio overlap in mutual funds:

Portfolio overlap in mutual funds occurs when different funds share significant holdings, potentially leading to concentration risk and undermining diversification efforts. It's important to manage overlap to ensure a well-balanced and efficient investment portfolio, avoiding redundancy and optimizing strategic allocation.

Risks associated with high portfolio overlap:

High portfolio overlap risks concentration, increasing vulnerability to underperforming assets and market volatility. Limited diversification leaves the portfolio exposed to specific sectors, impacting overall performance. Dependency on shared factors and lack of flexibility hinder adaptability to changing markets. Reduced potential for alpha arises from overlapping investments, diminishing unique opportunities. Performance correlation weakens diversification effectiveness. Moreover, overlapping funds may incur unnecessary duplication of fees, reducing portfolio efficiency. 

Identifying Portfolio Overlap

Analyzing common holdings among funds involves using tools like portfolio analysis software, correlation analysis, and factor analysis. Check fund fact sheets, reports, and visualizations to identify shared stocks or sectors. Customized spreadsheets can aid in a personalized analysis. Consulting with financial professionals adds valuable insights. This comprehensive approach helps recognize overlap and informs strategic adjustments for a well-optimized investment portfolio.

Reasons for Portfolio Overlap

Similar investment strategies:

Funds with similar investment strategies often end up with overlapping holdings. When multiple funds follow comparable approaches, such as value investing, growth investing, or a focus on certain sectors, they are likely to invest in the same or similar stocks. This commonality in strategy leads to shared holdings and, consequently, portfolio overlap. Investors should be aware of this when diversifying their portfolios to avoid unintentional concentration in specific assets or sectors.

Overreliance on specific sectors or stocks:

Overreliance on specific sectors or stocks in a short period is risky due to heightened volatility, increased exposure to event risk, limited diversification benefits, challenges in handling sector rotations, susceptibility to economic and business cycle risks, lack of flexibility, single-stock risk, and potential loss magnification. To mitigate these risks, investors should maintain a well-diversified portfolio, regularly reassess their investments, and stay informed about market dynamics for long-term success. Balancing risk and reward is crucial.

Risks of High Portfolio Overlap

Concentration risk:

High portfolio overlap poses several risks, and concentration risk is a primary concern. Concentration risk refers to the danger of having a significant portion of the portfolio invested in a limited number of assets, such as specific sectors or stocks.

To mitigate concentration risk associated with high portfolio overlap, investors should consider diversifying their holdings across different sectors, industries, and asset classes. Regular portfolio reviews, risk assessments, and adjustments are essential to ensure a more balanced and resilient investment strategy.

Impact on diversification benefits:

High portfolio overlap negatively impacts diversification benefits. Concentrating investments in specific sectors or stocks reduces the spread of risk across different assets. This lack of diversification heightens vulnerability to adverse movements in those limited areas, diminishing the potential risk reduction that a well-diversified portfolio offers.

Strategies to Reduce Portfolio Overlap

Diversifying across fund categories:

To reduce portfolio overlap, one effective strategy is diversifying across fund categories. This involves spreading investments across different funds, such as equity, bonds, and alternative investments, to mitigate concentration in specific sectors or asset classes.

Investing in thematic or niche funds:

To address portfolio overlap, consider investing in thematic or niche funds. These funds focus on specific themes or industries, providing a way to diversify and reduce concentration risk in the overall portfolio.

Regularly reviewing and rebalancing the portfolio:

Regularly reviewing and rebalancing the portfolio is a crucial strategy. This involves periodically assessing and adjusting the asset allocation to align with investment goals. It helps maintain diversification, manage risk, and adapt to changing market conditions.

Successful strategies employed by investors

Successful investors employ diverse strategies, such as diversification for risk reduction, adopting a long-term perspective, conducting thorough research for informed decisions, implementing risk management, regularly reviewing and adjusting portfolios, staying informed about market trends, being adaptable to changing conditions, consistent savings to leverage compounding, practicing patience and discipline, and seeking professional advice when needed. These strategies are often personalized based on individual risk tolerance, financial goals, and market outlook.

Expert Insights 

Advice from financial experts often includes:

  • Diversification: Spread investments across various sectors and asset classes to reduce concentration risk.
  • Regular Monitoring: Continuously assess the portfolio and adjust allocations to align with changing market conditions.
  • Risk Assessment: Conduct thorough risk assessments to understand potential downsides and implement risk management strategies.
  • Stay Informed: Keep abreast of market trends, economic indicators, and global events to make well-informed decisions.
  • Professional Guidance: Seek advice from financial advisors to gain personalized insights based on individual financial goals and risk tolerance.

Common Pitfalls to Avoid:

  • Overreliance on Specific Assets: Avoid concentrating too heavily on specific sectors or stocks, as it amplifies risks.
  • Lack of Diversification: Failing to diversify increases vulnerability to market fluctuations and unforeseen events.
  • Neglecting Regular Reviews: Not periodically reassessing and adjusting the portfolio can lead to outdated and suboptimal asset allocations.
  • Ignoring Market Trends: Refrain from staying informed about market dynamics to avoid missed opportunities or failure to react to potential risks.
  • Impulsive Decision-Making: Acting on emotions rather than a well-thought-out strategy can lead to poor investment choices.
  • Underestimating Risks: Disregarding the potential risks associated with concentrated portfolios may lead to significant losses.
  • Chasing Performance: Falling into the trap of chasing recent top performers without considering long-term sustainability.


  1. What is portfolio overlap in mutual funds, and why is it important to understand?

Ans) Portfolio overlap refers to the common holdings shared by multiple mutual funds in an investor's portfolio. It's crucial to grasp because excessive overlap can lead to increased risk and lack of diversification. When multiple funds hold similar assets, the portfolio becomes more vulnerable to market fluctuations.

  1. How can I identify portfolio overlap in my mutual fund investments?

Ans) To identify portfolio overlap, analyze the individual holdings of each mutual fund in your portfolio. Look for shared stocks or securities among different funds. Tools like Morningstar or the fund's fact sheet can help you compare holdings. A thorough review will enable you to gauge the extent of overlap and make informed decisions.

  1. What are the potential risks associated with high portfolio overlap in mutual funds?

Ans) High portfolio overlap increases concentration risk, making your investments more susceptible to sector-specific downturns. If a significant portion of your portfolio consists of overlapping holdings, it amplifies the impact of adverse market movements on your overall investment value. Diversification is essential to mitigate such risks.

  1. How can I reduce portfolio overlap in my mutual fund portfolio?

Ans) To reduce portfolio overlap, diversify your investments across different asset classes, sectors, and fund categories. Regularly review your portfolio's composition and identify redundant holdings. Consider consolidating or replacing funds with high overlap, focusing on those that bring unique assets to your portfolio.

disclaimer: the information provided in this blog is for general informational purposes only. it should not be considered as personalised investment advice. each investor should do their due diligence before making any decision that may impact their financial situation and should have an investment strategy that reflects their risk profile and goals. the examples provided are for illustrative purposes. past performance does not guarantee future results. data shared from third parties is obtained from what are considered reliable sources; however, it cannot be guaranteed. any articles, daily news, analysis, and/or other information contained in the blog should not be relied upon for investment purposes. the content provided is neither an offer to sell nor purchase any security. opinions, news, research, analysis, prices, or other information contained on our blog services, or emailed to you, are provided as general market commentary. stack does not warrant that the information is accurate, reliable or complete. any third-party information provided does not reflect the views of stack. stack shall not be liable for any losses arising directly or indirectly from misuse of information. each decision as to whether a self-directed investment is appropriate or proper is an independent decision by the reader. all investing is subject to risk, including the possible loss of the money invested.

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