When most people start investing in mutual funds, they’re told one golden rule that is to diversify. If you’re planning to invest in mutual funds, even the best mutual fund services in Pune will ask you to diversify.

The idea: spread your money across different funds so that even if one underperforms, others can balance it out. But many investors end up buying multiple funds that actually hold the same stocks. This situation is called mutual fund overlap, and it quietly reduces the benefit of diversification.

Let’s break this down step by step so even beginner investors can clearly understand how mutual fund overlap works.

Mutual fund overlap happens when two or more of your mutual funds invest in the same stocks or sectors. For example, if you own three different equity funds and all of them have heavy investments in large banking companies. You’re essentially betting multiple times on the same stock.

On the surface, it may look like you have three separate funds, but in reality, you’re just repeating your exposure. Instead of reducing risk, this increases concentration risk in your portfolio.

This is where choosing the top mutual funds service provider in Pune, such as Golden Mean Finserv, can help you avoid such common mistakes.

Diversification is like spreading your eggs across different baskets. But overlap means some of those baskets are actually the same. Here’s why this can hurt your investments:

Reduced diversification: You think you’re spreading out risk, but overlap keeps your portfolio concentrated.

Higher risk: If the overlapping stock or sector falls, your entire portfolio takes a bigger hit.

Extra costs: Having many funds with similar holdings means you’re paying additional expense ratios without gaining anything extra.

False sense of safety: You might believe you’re protected with many funds, but they may all react the same way in the market.

Choosing funds from the same category: Two different large-cap funds will likely have similar holdings.

Similar stock picking by fund managers: Good companies are often chosen by many fund managers, leading to duplication.

Index funds following the same benchmark: Two index funds tracking the same index will naturally overlap.

Lack of review: Many investors never check their fund factsheets or holdings, so they remain unaware of duplication.

The good news is that spotting overlap isn’t as difficult as it sounds. Here are some simple ways to do it:

Check top holdings: Go through your fund factsheets and see if the same stock appears repeatedly.

Look at sector allocations: If most of your funds are tilted toward the same sector (like banking or IT), overlap is likely.

Compare performance patterns: If multiple funds show almost identical performance, chances are they hold similar stocks.

If you’ve identified overlap in your portfolio, don’t panic. Here are some practical strategies to fix it:

Mix fund categories: Combine large-cap, mid-cap, small-cap, and thematic funds instead of sticking to one type.

Choose different styles: Pair a growth-focused fund with a value-oriented fund for variety.

Limit the number of funds per category: Two or three funds are usually enough. Don’t over-diversify.

Avoid too many index funds of the same benchmark: One or two are sufficient.

Review regularly: Keep checking your portfolio at least once or twice a year to spot changes.

Mutual fund overlap is a silent problem many investors overlook. You may believe you’re diversified by owning multiple schemes, but if they all invest in the same set of companies, your portfolio is far riskier than it appears.

The key is not to own more funds, but to own different funds. With the right planning, regular review, you can build a well-balanced portfolio that truly spreads risk and works toward your financial goals.