Eight funds, one portfolio: a short note on overlap

A portfolio arrives for review. Eight equity schemes, accumulated over about twelve years, from four different people who were helpful at the time. The investor is mildly proud of it — they have, as they put it, “spread the risk around”.

Then we pull the underlying holdings. Six of the eight schemes hold the same handful of large private banks, the same two software exporters and the same diversified conglomerate among their top ten positions. Weighted across the portfolio, roughly 60% of the equity exposure sits in about fifteen companies.

That is not eight bets. That is one bet, placed eight times, with eight separate expense ratios attached to it.

Where the duplication comes from

It is rarely anybody’s fault in particular. It accumulates:

• Schemes are bought one at a time. Each addition is judged on its own merits, never against what you already hold. The eighth fund was a perfectly reasonable fund — it was just reasonable in exactly the same way as the third.
• Category labels obscure more than they reveal. A “flexi-cap”, a “large-and-mid-cap” and an “ELSS” can hold near-identical portfolios. The label describes the mandate, not the positions.
• India’s investable universe is narrower than it looks. Any fund manager running a liquid, large-cap-tilted book is fishing from a fairly small pond. Convergence is structural, not lazy.
• Nobody ever removes anything. Adding a fund is a decision with an obvious rationale. Removing one requires admitting a previous decision was redundant, and may trigger a tax bill.

Why it matters, and why it sometimes does not

Let us be precise, because overlap is routinely over-dramatised.

Overlap does not, in itself, lose you money. If the fifteen companies do well, a concentrated portfolio does well. The problem is narrower than “you will underperform”:

1. You are carrying risk you did not choose. You believe you are diversified across eight schemes. You are in fact heavily exposed to one sector cluster. When that cluster has a poor three years, every one of your eight funds will disappoint simultaneously, and the experience will feel inexplicable.
2. You are paying for duplication. Each scheme charges its own expense ratio. Paying four separate fees for four near-identical exposures buys you nothing the first one did not already provide.
3. You cannot monitor eight things properly. Attention is finite. Four schemes you understand will be managed better than eight you cannot keep track of.
4. Rebalancing becomes impossible. If you cannot articulate what each fund is for, you have no basis for deciding which to trim when one grows disproportionately.

A test you can apply yourself

You do not need software for the first pass. Open your Consolidated Account Statement, list the schemes, and against each one write a single sentence beginning “This fund is here to…”.

Three things tend to happen. Some sentences come easily and differ meaningfully from each other — those funds are earning their place. Some sentences come out nearly identical — those are candidates for consolidation. And for at least one, usually, no sentence comes at all. That is the fund somebody sold you.

For the second pass, pull the monthly portfolio disclosure each AMC publishes, and compare the top ten holdings across your schemes. You are not looking for zero overlap, which is neither achievable nor desirable. You are looking for whether the same five names dominate every list.

What to actually do about it

Here is where most writing on this subject becomes irresponsible, by jumping straight to “consolidate into three or four funds”. Switching has consequences, and they need to be on the table before anything is sold:

• Capital gains. Redeeming units is a taxable event. A switch that improves your portfolio structure by a modest margin, while triggering a substantial tax bill, may not be worth doing — or may be worth doing gradually across financial years.
• Exit loads. Units held for less than the scheme’s stated period may attract a charge on redemption.
• ELSS lock-ins. Tax-saving units simply cannot be redeemed before three years, per instalment. There is nothing to decide until they are free.
• Stopping beats selling. Very often the right first move is not to redeem the duplicate scheme at all, but to stop contributing to it and direct future instalments where they belong. The existing units stay put, no tax is triggered, and the portfolio corrects itself over time.

In short

The number of schemes in a portfolio tells you almost nothing about how diversified it is. What matters is whether each one is doing a job the others are not. Four funds with distinct mandates is a portfolio. Eight funds buying the same fifteen companies is a single position with administrative overhead.

If you are not sure which you have, that is precisely what a portfolio review is for — and it is entirely possible the conclusion will be that yours is fine.