How to avoid portfolio overlap when investing in mutual funds

Diversification is key to a booming portfolio of mutual funds. As the saying goes, “Too much of anything is bad for nothing.”

Investors often add too many mutual funds to their portfolios—sometimes as many as 10 to 15 schemes—thinking that this will lead to the best diversification. However, this strategy can often result in mutual fund portfolio overlap, especially if the funds are all from the same category or managed by the same fund manager or fund company. Mutual fund portfolio overlap occurs when you have two or more schemes with similar investments.

It is essential to evaluate your mutual fund portfolio if you have too many schemes. This evaluation will help you take the necessary steps to maximise your returns. But first, let’s explore how mutual fund overlap can harm your returns.

The dangers of mutual fund overlap

High mutual fund overlap can be counterproductive to diversification. Some schemes might occupy space in your portfolio without providing any real value or benefit. This situation exposes your portfolio to concentration risks, leading to polarised results, as it may become heavily skewed toward certain stocks, markets, sectors, or investment styles. Additionally, it increases the workload for portfolio monitoring and rebalancing.

How many mutual funds should you have in your portfolio?

Mutual fund investments should be made according to your investment horizon and financial goals; they shouldn’t be made ad hoc. Aim to own no more than 5 to 8 mutual funds across all categories, including debt, equity, and others. If you have a modest investment and a moderately risky profile, you may want to consider adding a scheme from each of the following categories:

• Large Cap Funds
• Flexi Cap Funds
• Aggressive Hybrid Funds

Only add multiple schemes within the same category if they follow different investment strategies or styles. If you have a substantial amount of money to invest, it makes sense to diversify your portfolio by investing in several schemes.

Avoid overlapping schemes by reviewing your portfolio

Reviewing your mutual fund portfolio is essential to determine if there is excessive overlap and to eliminate schemes that are underperforming. This process will help you achieve your financial goals.

Here’s how to optimise your portfolio if you have too many mutual funds and are concerned about portfolio overlap:

1. Remove underperformers: If you’ve added more than one scheme to the same category, eliminate the one that consistently performs below its benchmark and category average over a prolonged period.
2. Align with financial goals: Eliminate those schemes that do not align with your financial goals and add unnecessary risk to your portfolio.
3. Limit fund managers: Reduce the number of schemes offered by the same fund manager or fund house, as they will likely have similar investment strategies or styles.
4. Limit similar categories: Avoid adding more than two schemes in the same category, as most schemes within one category invest in the same stocks.
5. Be wary of recommendations: Refrain from adding a mutual fund scheme to your portfolio simply because a friend, relative, or colleague recommended it or because you find the sales pitch appealing.

Main benefits of a mutual fund portfolio review

If you’re looking for professional help to consolidate or review your portfolio, consider signing up for a Portfolio Review Service. This service is designed to increase mutual fund returns.

• Correct past mistakes: It helps correct past mistakes when investing and suggests the options most suitable for you.
• Informed decisions: This service will tell you which funds you should sell immediately, which you should hold onto, and what you need to do with the money obtained from selling non-performing funds.

Get started

To get started, fill out the form below to have fund experts review your mutual fund portfolio. Our team will contact you with any questions. Afterwards, you’ll be asked to send your portfolio to our team (we will guide you through this process). The experts will perform a thorough analysis of your portfolio and provide their opinions within 15 working days or earlier in a “special customised report.”

Conclusion

Avoiding portfolio overlap of mutual funds is essential for diversification and maximising returns. It may be tempting for you to invest in many mutual funds. However, this can result in redundancy and increased risks, which will undermine your financial goals. You can improve your investment strategy by limiting your portfolio to five to eight funds.

Reviewing your mutual funds regularly can help identify underperformers and align your goals with your investments. By eliminating schemes that don’t meet benchmarks for performance or introduce unnecessary risks, you can streamline your portfolio and make it easier to monitor.

A Portfolio Review Service offers valuable insight and tailored recommendations. This proactive approach helps you correct past mistakes and also positions yourself to make informed investments. Maintaining a well-structured, diversified portfolio allows you to better navigate market fluctuations and achieve your financial goals. Focusing on quality rather than quantity will help you build a mutual fund portfolio that is aligned with your investment horizons and risk tolerance.

 

The above information does not constitute any form of advice or recommendation by London Loves Business and is not intended to be relied upon by users in making (or refraining from making) any finance decisions. Appropriate independent advice should be obtained before making any such decision. London Loves Business bears no responsibility for any gains or losses.