Portfolio Overlap — Diversification You Think You Have

Nobody sets out to buy the same thing four times. It accumulates.

One scheme was bought years ago through a bank. Another came from a colleague suggestion. A third was added because a list said it was performing. Each decision was made on its own, none of them looked at what was already held, and the result is a collection rather than a portfolio.

The other reason is structural. Schemes in the same category are drawing from the same universe of companies, and the largest companies in an index appear in most schemes that invest in that segment, as our page on large, mid and small cap funds explains. Two large company schemes from different fund houses holding many of the same names is not a failure by either manager. It is what the category is.

Not because duplication costs you anything directly. Because it misleads you about your own position.

A household that believes it is spread across seven schemes will size its equity exposure accordingly, and may hold more than it would have if it could see that the underlying holdings were concentrated. When that segment has a bad stretch, the whole portfolio moves together, which is exactly what the person thought they had avoided.

There is a measurement consequence too. Comparing one scheme figure against another tells you very little when both are driven by the same underlying companies, which is worth remembering alongside our page on how returns are calculated.

It also makes the portfolio harder to manage. Seven statements, seven sets of details to keep current, seven things to review, and in return an exposure that two or three schemes would have delivered. Our page on asset allocation covers what the exposure should have been in the first place.

This takes an hour once, and you do not need any special tool.

Pull the current fact sheet for each scheme you hold, which our page on the fact sheet describes. Write down the top ten holdings of each in a column. Put the columns side by side.

Two things become visible immediately. How many company names appear in more than one column, and how the sector weights compare. If the same five names lead three of your schemes, you have your answer without calculating anything.

Comparison tools exist that will give you a percentage figure, and they are convenient. The column exercise tells you more, because you see which companies rather than a single number, and it is the sector concentration that usually surprises people most.

Not all of it is a problem, and the reflex to eliminate it entirely leads somewhere worse.

A large company scheme and a mid cap scheme will share little, and both belong in many portfolios. A domestic scheme and one investing abroad share almost nothing, as our page on international funds covers. Overlap between an equity scheme and a debt scheme is not a concept that applies.

Even within a category, some duplication is unavoidable, because a limited number of large companies dominate. Somebody holding two schemes in the same segment is not making a serious mistake, particularly if there is a reason for holding both.

The problem is not overlap existing. It is a household believing it holds seven different things when it holds two things seven times.

Every discussion of this looks only at mutual funds, which is measuring part of the picture.

Shares held directly frequently duplicate what the schemes already hold, since people tend to buy the same well-known companies the schemes are weighted towards. That is overlap and almost nobody counts it, as our page on mutual funds versus stocks notes.

The equity portion inside a hybrid scheme counts too, and so does any market-linked portion held elsewhere. Somebody with an equity scheme, a hybrid scheme and six direct shares often has a far more concentrated position than the arrangement suggests.

Company overlap is the version people look for. Sector overlap is the one that actually decides how the portfolio behaves, and it is easier to miss.

Two schemes can hold almost no companies in common and still be heavily weighted to the same two or three sectors. When conditions turn against those sectors, both fall together, and the household sees a correlated portfolio it was told was diversified.

Indian equity indices are themselves concentrated in a handful of sectors, so any scheme investing broadly inherits some of that. Add a thematic holding on top and the weight can become considerable without any single scheme looking unusual, as our page on sectoral and thematic funds sets out.

The sector breakdown sits on the same page of the fact sheet as the holdings. Comparing those columns takes the same ten minutes and usually tells you more than the company list did.

Less than people expect, and slowly.

The first response should not be to sell. Consolidating means redeeming, and that carries exit load and tax whether or not it improves the portfolio, which our page on switching between schemes sets out. A portfolio with some duplication is not an emergency.

The cheaper fix is to stop adding to the duplicates. Direct new instalments to whatever is genuinely missing rather than to another scheme in the segment you already own three of. Over a few years the shape corrects itself without a single sale.

Where consolidation is genuinely worth doing, do it deliberately and check the cost first, as our page on when to sell covers. If you would like somebody to lay your holdings out in columns with you, that is routine work here and there is no charge for looking. Get in touch.