overlapping of mutual funds – All you need to know…

Are you looking to invest in mutual funds for an inflation-adjusted return on investment? While investing in these funds, you may consider multiple schemes. But you should select funds that have low overlapping or no overlapping.
What is overlapping in mutual funds?…
You can see in the above image that there are two hear images, which are overlapped with one another.
When you are investing in mutual funds, some overlapping, like in the above image, can occur in mutual funds also.
Sometimes, investors will have overlapping positions in mutual funds or exchange-traded funds (ETF’s).
For example, you have invested in Nifty 50 ETF, a banking sector mutual fund scheme.
Then some stocks will be repeated in both nifty ETF funds and banking sector mutual schemes. (HDFC Bank, SBI, Icici Bank, etc.).
In addition, these are large-cap stocks.
And too much concentration will be created for a few companies.
Moreover, the fund overlapping will reduce the benefit of diversification.
And may create un-seen risks.
Understanding overlapping of funds…
Some low level of overlapping is fine.
But significant overlapping can increase company-specific or sector-specific risk.
Which can decrease the returns from your investments compared to benchmark returns.
In addition, it will be tough for retail investors to track the mutual fund holdings every time.
But monthly or quarterly fact sheets of mutual funds will publish the top holdings.
And if the investor sees an increase in overlap between any two funds, then the investor should sell one of the funds and look to buy another fund that has low overlap.
If, for example, two funds overweight the same stock. Then investors sell one of the funds and look to invest in a similar fund that does not hold that stock.
You can see in the above image that both the Uti nifty 50 index fund and the Axis blue chip fund have 59% overlapping, which is high.
In addition, an overlap of 15% or less can be accepted if you would like to hold two funds.
Sometimes, two funds will weigh high exposure in the same sector (technology).
Then, investors should access the pros and cons of this high exposure for the same sector.
Overweighting Sectors…
A security will be said overweighted.
If it is held higher% in the fund than its bench market portfolio.
In addition, an actively managed mutual fund portfolio will have overweight positions compared to its benchmark.
And the fund manager allocates a higher percentage than the benchmark portfolio to one particular stock if he thinks that the stock will move up.
Moreover, he will do this to increase the return of investment for the mutual fund scheme than the benchmark index.
Sometimes, the fund manager will give overweight to one stock to hedge the risk of having overweight to another stock.
Again, other alternative recommendations are equal weight and underweight.
And equal weight means the stock will perform in line with the index, and underweight means the stock will underperform compared to its benchmark.
Mutual Fund Overlap and Diversification…
Investors will do asset allocation and invest funds that invest in equity, commodities, bonds, etc.
While doing this, investors must consider low-overlapping funds.
In addition, they should consider funds that have low or negative corelation.
Read about debt mutual funds—all you need to know…
Also read about Types of Debt Mutual Funds: After Sebi categorisation…
And read about liquid funds—all you need to know…
Also read about Best Date for Sip in Mutual Funds—All you need to know…
And read about asset allocation and its importance…