MF portfolio overlap

Mutual fund portfolio overlap tool

The mutual fund portfolio overlap tool lets you compare and know the extent of commonalties between the portfolios of 2 or 3 equity funds. There are no category restrictions here and you can compare overlaps between funds across categories, whether active or passive. You can choose to compare the mutual fund overlap of 2 funds or 3 funds.

The mutual fund overlap is based on the latest available monthly fund portfolios. Do note that this tool covers pure equity funds only, as overlaps are an important consideration for these funds alone.

Here’s how to read the output:

  • The graph on the left shows you the overall overlap by portfolio weight between each pair of funds and the overlap for all 3 funds. This is calculated by taking the common weights of each stock across the fund portfolios.
  • The table on the right gives the list of stocks common between each pair of funds and the common stocks for all 3 funds. It additionally lists the weight of these stocks in each fund’s individual portfolio.
  • The metrics below the mutual fund overlap data cover basic details and key performance metrics that enable a more detailed comparison of the funds.

If you’re looking at funds across categories, do bear this difference in mind when comparing performance and overlap metrics.

What is mutual fund portfolio overlap?

Mutual fund portfolio overlap refers to the common stocks between two funds or the extent to which two fund portfolios share similarities. Essentially, it involves comparing the underlying portfolios of the funds you wish to compare, identifying the securities that are common between the two and then computing by how much the overlap occurs. Most commonly, mutual fund portfolio overlap can occur:

  • Among funds under the same category - for instance, 2 large cap funds can have many stocks that are common to both their portfolios as the investible universe of large-cap stocks is limited.
  • Among funds falling under categories with overlapping definitions as per SEBI (flexi cap funds for instance could hold stocks that are held by large cap funds / mid cap funds / small cap funds as well)
  • A sector leading stock could figure in a sector specific fund as well as a large cap fund; sector funds may also share similarities in stocks they invest in as they are restricted to a particular sector.

Of course, mutual funds overlap can occur in many ways other than those listed above as well. Do note, however, that the mutual funds overlap percentage is not static and is likely to change based on changes in the underlying holdings of the funds.

Mutual funds overlap information can be a valuable input when you are looking to add a fund to your portfolio. The overlap information can help you evaluate whether the fund will increase exposure to some companies or sectors in your portfolio. This is also a valuable input when you are trying to prune your portfolio and can tell you if you have multiple funds that are essentially doing the same thing for you.

What does mutual fund portfolio overlap tell you?

Some degree of overlap between funds is acceptable and unavoidable, especially when they belong to the same category. Overlap becomes a factor to consider only if the degree of overlap is high. This is because:

  • If you were to invest in funds with a high degree of overlap, you could unknowingly be increasing your exposure to some stocks or sectors. This means that anything that negatively affects the overlapping stocks could be felt more acutely in your portfolio. By over-exposing to some sectors, you could also be setting your portfolio up to go through the ups and downs of cyclicality that many sectors face.
  • Funds that heavily overlap can also behave in a similar fashion in terms of volatility or returns. Therefore, instead of diversifying your portfolio by adding the fund, you could simply be increasing the duplication.
  • If you were to invest in funds with a large extent of similarities, you could be limiting your portfolio’s ability to access different market opportunities. Your portfolio could, instead, be restricting itself to a smaller set of stocks or sectors.

Other factors to consider along with mutual fund portfolio overlap

As with any metric to assess funds, overlap between funds cannot be viewed in isolation. A fund’s performance is ultimately what matters. Therefore:

  • Returns come from a fund’s full portfolio and stock weights. Therefore, while there can be a higher degree of overlap between funds, the difference in weights to common stocks as well as the unique stocks can make a difference to performance. This is unlikely in extremely high overlaps of 80% or more – but for others, look at other performance metrics before making an investment decision.
  • Consider metrics that will throw more light on aspects such as how much risk a fund has taken and how volatile its returns are. The standard deviation of the fund will show you the extent of fluctuations that the returns have seen. Sharpe ratio will tell you how much risk the fund has taken to achieve the returns that it has. Extent of falls will show you how well the fund has been able to contain its downside risk. These metrics have been provided in the data below the output of the Mutual Fund Overlap Tool.
  • Mutual funds overlap is also based on monthly portfolios, and overlap changes as portfolios change. A key metric to consider, therefore, is a fund’s consistency or how well it has beaten its benchmark and its category. Both metrics are provided, as well, in the tool.
  • Fund manager and AMC track records too will be important factors to consider in fund evaluation.

If you are relatively new to mutual fund investing, refer to ‘Understanding mutual fund returns’ which breaks down the basics of mutual fund returns for you. ‘Mutual fund rolling returns – 3 things you must know’ takes a deeper look at rolling returns and how you can use it to manage your portfolio, with the help of our tools of course – the mutual funds rolling returns calculator and mutual funds rolling returns - category wise that will help you calculate and compare against category peers respectively. Our Mutual Fund Review Tool and our carefully constructed ready-to-use portfolios at Prime Portfolios will reduce your load by doing a lot of the homework for you.

General disclosures and disclaimers

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