Why your mutual fund portfolio is probably four funds pretending to be nine
Portfolio overlap is the quiet destroyer of diversification. Owning more funds is not the same as owning more companies.
A portfolio assembled one recommendation at a time tends to accumulate funds rather than exposures. It is entirely normal to find nine equity schemes that between them hold the same thirty large-cap stocks.
What overlap costs you
- False diversification. You believe you are spread across nine strategies. You are concentrated in one.
- Higher blended cost. You pay active management fees for what is effectively index exposure.
- Harder rebalancing. Nine positions to trim instead of four, each with its own tax consequence.
How to measure it
Compare the top holdings of each scheme. Any pair sharing more than roughly 60 per cent of portfolio weight is doing one job, not two. Consolidate to the cheaper or more consistent of the pair.
Consolidating without a tax shock
Switching is a redemption for tax purposes. Sequence exits across financial years, use available exemptions, and prioritise units already past their long-term holding threshold. The tax cost of a badly sequenced clean-up can easily exceed the fee saving it was meant to deliver.
A workable target
For most investors, four to six funds covering large, mid and small-cap equity plus a debt allocation is sufficient. Beyond that, each addition dilutes rather than diversifies.