You chose 2 funds. You may have bought the same stocks twice

Summary: Two large-cap funds. Different names, different fund houses, different managers. On average, 45 per cent of the two portfolios is identical. The diversification most investors think they have built may not exist at all.

You hold two large-cap mutual funds. Different names. Different fund houses. Different fund managers. You think you are diversified.

On average, 45 per cent of those two portfolios is identical. Across 265 fund pairs in this category, more than half the holdings are shared. You have two folios. In many cases, you have one portfolio.

This is not a fund manager's mistake. It is what happens when the pool of stocks a fund can choose from is too small for two managers to arrive anywhere different.

The categories where it gets worse

Banking funds are the starkest example. India has fewer than 45 listed banks of meaningful scale. Every banking fund circles the same large private-sector and public-sector names. Two managers, two fund houses, two products, and an average overlap of 48.4 per cent.

Large-cap follows the same logic. SEBI requires large-cap funds to put at least 80 per cent of their money into the top 100 listed companies by market capitalisation. Most managers concentrate further, 30 to 40 high-conviction names from an already narrow list. Two managers working independently, with different research teams, arrive at portfolios that are nearly identical. Not because they copy each other. Because the pool does not give them much choice.

Look at the returns column alongside the overlap figures. In large-cap, the middle half of funds delivered between 7.6 and 10.4 per cent over five years. In banking, between 9.0 and 12.2 per cent. The range is narrow. It is narrow because when two managers hold largely the same stocks, there is not much room for one to do meaningfully better than the other.

Technology is the case that should make every sectoral investor pause. The middle half of technology funds delivered five-year SIP returns of negative 3 to 1.9 per cent. High overlap. Poor returns. Holding two technology funds did not spread the risk. It doubled the exposure to a category that went nowhere for five years.

In these five categories, two funds means one bet taken twice.

The categories where it does not happen

Widen the pool and the picture changes entirely. These five categories have not produced a single fund pair with overlap above 50 per cent.

International funds average 4.7 per cent overlap. The global universe runs into thousands of listed companies across many countries. Two Indian fund houses picking from that universe arrive at completely different portfolios—different geographies, different sectors, different companies. The category label is the same. The products are not.

Small-cap funds average 12 per cent. More than 500 small-cap companies are listed in India. Two managers building 50 to 60-stock portfolios scatter across that universe based on their own research. The chances of them landing in the same places are low. And the data confirms it.

Multi cap, Thematic-Innovation, and Thematic-Business Cycle complete the list. Each has either a wide investable pool or a loosely defined theme that different houses interpret in their own way. One house's Innovation fund may focus on technology; another's on consumer disruption or new-age business models. The category name is the same. The portfolio is not.

The returns column here tells a different story too. International funds show a five-year SIP return band of 15.9 to 22 per cent for the middle half, more than six percentage points of spread even after removing the best and worst performers. That spread exists because the funds are genuinely different. In these categories, which fund you pick matters. In the high-overlap categories, it barely does.

What to do with this

The size of the investable universe explains nearly everything. Small pool, similar portfolios. Large pool, genuinely different ones.

Before you add a second fund in any category, check the actual stock-level overlap. The category label tells you the investment strategy. It does not tell you whether the second fund is adding anything the first one does not already give you.

Most investors never check. They hold two funds and assume they hold two bets. Value Research Fund Advisor looks inside your portfolio, not just at the names, but at what they actually own, so you know whether your second fund is earning its place or quietly doubling your first one.

If genuine diversification is what you are after, the categories with wide universes—small-cap, multi-cap, international, thematic funds with broad mandates—are where a second fund actually earns its place.

If you want focused exposure to a sector you believe in, one well-chosen fund is almost always enough.

The second fund is not a hedge. In most cases, it is a copy.

A note on methodology

The overlap figures here compare funds across different fund houses, not two funds from the same house. SEBI's rules already limit similarity within a single fund house. What those rules do not address is whether two funds from two different houses, sold as separate products, hold meaningfully different portfolios. For each same-category fund pair, we calculated stock-level overlap—the share of the portfolio that is identical between the two funds, weighted by how much each fund holds in each common stock. A 50 per cent overlap means half the combined portfolio sits in the same companies at broadly similar weights.

Also read: Why is this veteran large & midcap fund losing ground?