What Is Mutual Fund Portfolio Overlap, and Why Does It Matter?

Many investors start a new SIP every time a friend suggests a fund. A Systematic Investment Plan (SIP) means you invest a fixed amount every month. After a few years, you may hold six or seven funds.

It feels safe, because you have spread your money. But the funds may hold the same stocks. Then you have many folios and very little real spread. This post shows you how to spot the problem and fix it.

What Is Mutual Fund Portfolio Overlap?

A mutual fund collects money from many people. It then buys stocks, bonds, or other assets. The list of what a fund owns is called its portfolio.

Portfolio overlap is the share of the portfolio that two funds have in common. The share is shown as a percentage. An overlap of 0% means the funds share no stock. An overlap of 100% means the portfolios are identical.

For example, you may hold a large-cap fund and a flexi-cap fund. A large-cap fund invests mainly in the biggest listed companies. A flexi-cap fund can invest in companies of any size. Both funds may still hold the same big banks and IT companies. That shared part is the overlap.

How Do You Calculate Overlap Between Two Funds?

The method is simple. List the stocks that both funds hold. Note the weight of each stock in each fund. Weight means the share of the fund’s money that sits in that stock. Then take the lower weight for each stock and add them up.

This is the same method used in SEBI’s circular of 26 February 2026. Say Fund A holds 5% in a stock and Fund B holds 10%. The overlap for that stock is 5%.

A Worked Example

The table below uses made-up numbers for two imaginary funds. It does not show any real scheme.

These six shared stocks alone give 30% overlap. Other shared stocks would push the number higher.

Now see what this means in rupees. Say you invest ₹10,000 a month in each fund. That is ₹20,000 a month in total. At 30% overlap, about ₹3,000 from each fund, or ₹6,000 in all, goes into the same stocks. You are paying two fund managers for the same bets.

Why Does Portfolio Overlap Matter?

Overlap matters for three reasons. Each one affects your returns or your risk.

1. It gives you false diversification

Diversification means you do not put all your money in one place. You want some of your money to do well when other parts fall. With high overlap, all your funds fall together, because they hold the same stocks.

2. It hides a large bet on a few stocks

Say three of your funds each hold 8% in one bank. Your total exposure to that bank is still about 8% of your equity money. But you may not see this, because it sits inside three different statements. One bad year for that bank hurts all three funds.

3. It adds cost and work

Every fund charges an expense ratio. The expense ratio is the yearly fee a fund takes from your money to run the fund. If two funds own the same stocks, you pay two fees for one set of stocks. You also have more folios to track and more paperwork at tax time.

Is All Overlap Bad?

No. Some overlap is normal. India has a limited number of very large listed companies. So funds in the same category will often hold the same names.

The real question is this: does each fund do a different job? A large-cap fund and a small-cap fund have different jobs. They also usually have low overlap. Two large-cap funds do the same job. They usually have high overlap. In that case, one fund may be enough.

Which Fund Combinations Usually Overlap the Most?

The table gives a general guide. Actual numbers change with each fund and each month. So always check the latest portfolios.

What Has SEBI Said About Portfolio Overlap?

SEBI, the Securities and Exchange Board of India, regulates mutual funds. It issued a circular on 26 February 2026 on how fund schemes are categorised. As per reports on the circular, sectoral and thematic funds must keep overlap with other equity schemes within 50%.

Fund houses have three years to reach this limit. The circular also asks fund houses to disclose overlap on their websites. Please verify the exact details from the SEBI circular, because the final rule has many conditions.

Note that this rule is aimed at how a scheme overlaps with other schemes. It does not manage the mix of funds you personally hold. So that check is still your job, or your advisor’s job.

Who Is Behind This Guide?

Deepak Gokul holds the CWM® certification and is NISM-Series-XVII: Retirement Adviser Certified. He is also an IRDAI Licensed Insurance Advisor. He has more than 19 years of experience in financial planning in Chennai. His firm, Deepak Wealth Framework Pvt Ltd, is AMFI Registered as a Mutual Fund Distributor.

In our experience, many families come with five to eight funds and no clear reason for each one. The first step is always the same. We list every fund and ask what job it does for the family’s goals.

How Can You Fix High Portfolio Overlap?

Follow these five steps. Do not rush to sell.

1. List every fund you hold. Include old SIPs and funds held by family members.
2. Write down each fund’s job. For example, large-cap for stability or mid-cap for growth. If two funds have the same job, mark them.
3. Check the overlap. Use the monthly portfolio from each fund house. Or use a free overlap tool on a research website.
4. Stop new SIPs in the duplicate fund first. This costs nothing. Your old units stay invested.
5. Sell only after checking the tax and exit load. Exit load is a fee some funds charge if you sell early.

Tax matters here. As per current Income Tax rules, equity fund gains you hold for more than 12 months are long-term. The tax is 12.5% on gains above ₹1.25 lakh in a year. Gains from units held for 12 months or less are short-term. The tax is 20%. Please verify these rates from the Income Tax Department before you sell.

Common Mistakes to Avoid

First, do not pick funds only because they rank high. Two top-ranked funds in the same category often hold the same stocks. Second, do not count the number of funds as your diversification. Third, do not check overlap once and forget it. Fund managers change holdings every month.

Frequently Asked Questions

What is a good overlap percentage between two mutual funds?

There is no official safe number. As a rough guide, it is worth a review when two funds overlap by more than about 50 percent. This is a practical guide, not an SEBI or AMFI limit. Check why you hold both funds, and whether each one adds something new.

How can I check the overlap of my mutual funds?

Take the latest monthly portfolio of each fund from the fund house website. Many research websites also offer free overlap tools. Enter your fund names. The tool shows the common stocks and the overlap percentage. Do this once or twice a year, and before you add a new fund.

Is portfolio overlap the same as lack of diversification?

Not exactly. Overlap means funds hold the same stocks. Lack of diversification means too much money sits in a few companies, one sector, or one asset type. High overlap can cause it. But you can also have low overlap and still be concentrated, for example if you hold only banking funds.

Does SEBI’s 50 percent overlap rule apply to all my funds?

The rule is aimed at sectoral and thematic schemes and how they overlap with other equity schemes. It does not manage the mix of funds you hold. Your own overall overlap is still yours to check. Please verify the details from SEBI’s circular of 26 February 2026.

Should I sell a fund if overlap is high?

Not right away. First check your goal, your holding period, and the tax. As per current rules, equity gains after 12 months are taxed at 12.5% above ₹1.25 lakh a year. Earlier gains are taxed at 20%. Often you can simply stop the SIP in the duplicate fund instead of selling.

How many mutual funds are enough?

There is no fixed number. Many families keep a small set of funds, each with a clear job. For example, one large-cap or index fund, one flexi-cap fund, and one mid-cap or small-cap fund. Fewer and clearer funds are easier to track. Your goals and risk level decide the right mix.

Related Reading and Next Steps

Learn more about us on the Deepak Wealth Framework home page. For official information, see these sources. Read the SEBI circular on categorisation of mutual fund schemes. Visit the AMFI website. Check tax rules on the Income Tax Department site.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully. This content is for illustrative and educational purposes only. We deal in Regular Plans.