mutual fund overlap is the degree of similarity between two or more schemes holding identical securities. when two funds hold the same stocks in similar proportions, they are overlapping.
the interpretation of overlap percentages is not uniform. different ranges mean different things. the context matters.
what the numbers mean
below 25%. this is healthy diversification. the funds hold different securities. each adds unique value to the portfolio. the investor is genuinely spreading risk across different companies and sectors.
25% to 33%. moderate overlap. some exposure is duplicated. the investor should monitor this level. it is not yet a problem but warrants attention.
33% to 50%. high overlap. diversification benefits are reduced. the funds are starting to look similar. one of the funds may be redundant.
above 50%. very high overlap. the two funds are essentially holding the same portfolio. the investor is paying multiple expense ratios for the same exposure. diversification benefits are limited.
how overlap is calculated
the calculation uses stock weight, not just the number of common stocks.
if scheme a and scheme b both hold 5% in reliance industries, that 5% is counted as overlap. if scheme a holds 8% in hdfc bank and scheme b holds 5%, the overlap contribution is 5%.
the lower weight is taken for each common stock and summed across all common holdings.
this weight-based method is more accurate than simply counting the number of common stocks. a 1% holding should not be treated the same as a 10% holding.
different categories, different overlap patterns
large-cap funds. these funds have the highest overlap because they are mandated to invest in the top 100 companies. a study by upwisery private wealth found that 73% of large-cap funds have 40-60% overlap. 24% have 60-80% overlap.
mid-cap funds. 84% of mid-cap funds have 20-40% overlap. the pattern is lower but still significant.
small-cap funds. 67% of small-cap funds have 0-20% overlap. this category offers the most genuine diversification because fund managers have a wider universe of stocks to choose from.
flexi-cap funds. 51% of flexi-cap funds have 20-40% overlap. 33% have 40-60% overlap. the variation is wider because these funds have more flexibility.
multi-cap funds. 69% of multi-cap funds have 20-40% overlap.
why overlap matters
false diversification. investors assume that holding multiple funds automatically reduces risk. if those funds hold the same stocks, they are not protected. the portfolio looks diversified on paper. but underneath, it is concentrated.
cost efficiency. every mutual fund charges a management fee. holding overlapping schemes means paying multiple fund managers to manage the same set of stocks. consolidating into a leaner portfolio is often more efficient.
concentration risk. if a sector or stock performs poorly, all overlapping funds take the hit simultaneously. the diversification benefit is lost.
single-sector downturn risk. if five funds in a portfolio have heavy exposure to the same technology stocks, a sector downturn can hit the entire portfolio.
sebi’s new overlap rule
in february 2026, sebi mandated that sectoral and thematic funds must cap portfolio overlap at 50% with other equity schemes within the same amc. fund houses have three years to comply.
amcs must publish monthly category-wise portfolio overlap disclosures on their websites. the overlap is computed quarterly using the average of daily overlap levels.
the rule aims to ensure that different schemes remain “true to label” and provide genuine diversification. it prevents situations where multiple funds essentially replicate the same investment strategy while being marketed as separate products.
however, the mandate only applies to overlap within the same amc. overlap across different amcs still requires checking with tools.
frequently asked questions
1. what is a healthy overlap percentage
below 25% is considered healthy. 25-33% is moderate and should be monitored. above 33% is high and warrants action.
2. how is overlap calculated
overlap is the sum of the lower weightings of every common stock held between two funds.
3. why do large-cap funds have high overlap
they are mandated to invest in the top 100 companies. fund managers often buy the same top stocks to avoid underperforming the benchmark.
4. does sebi’s overlap rule apply to all funds
it applies to sectoral and thematic funds vis-à-vis other equity schemes within the same amc. large-cap funds are exempt because they are mandated to invest in the top 100 stocks.
5. how often should overlap be checked
at least annually. mutual funds churn their portfolios, so overlap is a dynamic concept.
