The overlap problem: when three funds behave like one
Vikram thought he was diversified. He owned eight equity mutual funds across three AMCs. In his mind, eight funds meant eight different strategies, eight different fund managers making eight different bets. If one went wrong, seven others would hold the line.
Then, during a quarterly review, we showed him a chart that changed his understanding permanently.
We pulled the top-twenty holdings of each fund and mapped them against each other. The result looked like a family gathering where everyone has brought the same dish. Reliance Industries appeared in seven of the eight funds. HDFC Bank in six. Infosys in six. TCS in five. ICICI Bank in five.
Eight funds. But underneath the eight labels, roughly sixty percent of the total portfolio was invested in the same fifteen stocks. Vikram did not own eight strategies. He owned one-and-a-half strategies — with eight expense ratios attached.
"So when the market falls," Vikram said slowly, "all eight fall together."
Exactly. That is the cost of overlap — and it is not the expense ratio, though that matters too. The real cost is the false sense of diversification. The belief that you are protected, when in fact you are concentrated.
How overlap happens
Nobody sets out to build an overlapping portfolio. It accumulates the way clutter accumulates in a house — one well-intentioned addition at a time.
Year 1: you start an SIP in a large-cap fund. Sensible. Year 2: a colleague recommends a flexi-cap fund. You add it. The flexi-cap holds seventy percent large-cap stocks — but the name says "flexi," so it feels different. Year 3: the bank RM suggests a "blue-chip" fund. You add it. Same stocks, different label. Year 4: ELSS for tax-saving. Also large-cap heavy. Year 5: an NFO that promises "quality investing" — which, in practice, means the same twenty large-cap stocks that every quality-focused fund holds.
Each addition is reasonable. The aggregate is a problem. Five funds doing the same thing, charging separate fees, and providing the diversification of one.
The correction test
Overlap is invisible during rallies. When the market rises, all your funds rise together. You feel wealthy across eight lines on the statement. Everything is green. Everything is confirmation that your strategy is working.
The test comes during a correction. A genuinely diversified portfolio — with holdings across different market caps, different sectors, different asset classes — behaves unevenly during a fall. The large-cap portion drops fifteen percent. The debt portion holds steady. The gold allocation rises slightly. The small-cap portion drops sharply but you knew that was possible and sized it small. The portfolio, in aggregate, falls less than any single component — because diversification did its job.
An overlapping portfolio falls uniformly. Eight funds, all holding the same fifteen stocks, all falling eighteen percent in the same week. The family feels the full force of the correction multiplied by the number of lines on the statement. The emotional impact is eight times what it needs to be — and that emotional impact is what triggers the redemption that causes permanent damage.
The Dhansanchay review process
During reviews, we do a simple exercise. We pull the top-twenty holdings of every equity fund in the family's portfolio. We colour-code the repeats. If the same stock appears in more than three funds, it is flagged.
The conversation is always interesting. The family sees, often for the first time, that their "diversified" portfolio is actually a concentrated bet on Nifty's top fifteen companies — expressed through multiple fund managers charging separate fees for the same exposure.
The consolidation recommendation follows from the diagnosis. We do not say "sell these and buy those." We say: "Three of these five funds are doing the same thing. Let us keep the one with the lowest expense ratio and the longest track record, and redirect the other two SIPs into asset classes that are genuinely missing — a mid-cap fund, a debt component, perhaps a small-cap allocation sized to your risk tolerance."
The portfolio goes from eight funds to four. The overlap drops from sixty percent to fifteen percent. The expense ratio drops. The diversification — real diversification, not the label — improves. And the family, for the first time, holds a portfolio where different pieces behave differently during a correction. Which means the correction is survivable. Which means the SIP continues. Which means the compounding is unbroken.
That is what the shield is for. Not decoration. Protection — from the concentration you did not know you had.
Written for general education — not as individual investment, tax, or legal advice. Portfolio analysis requires reviewing your specific holdings with a qualified advisor.