How much of a portfolio overlap is acceptable?

Summary: When building an investment portfolio, many investors believe that spreading money across multiple mutual funds automatically ensures diversification. However, Dhirendra Kumar challenges this assumption. The critical question is not how many funds you hold, but how much overlap there is in their underlying holdings. Portfolio overlap occurs when multiple funds in your portfolio hold identical or similar stocks. As Dhirendra Kumar explains, "It should be as little as acceptable because if there is a 50-70 per cent overlap, then this diversification is only optical. Actually, there is very less diversification. You think that you have bought two-three investments, but the underlying is common across the funds." This distinction matters significantly. If you invest in three large-cap equity funds that each hold HDFC Bank, Reliance Industries and Infosys as major positions, you may feel protected by diversification. In reality, you've created concentrated exposure to the same few stocks while paying multiple expense ratios for what is essentially the same investment. Why overlap happens: The universe constraint The extent of portfolio overlap varies dramatically across fund categories, primarily because of the investable universe available to fund managers. Large-cap funds face the most constrained universe. SEBI regulations (mandated in 2018) require large-cap funds to invest at least 80 per cent of assets in the top 100 stocks by market capitalisation. This restriction inevitably creates overlap. Research data shows overlap between top large-cap funds can reach 65-69 per cent, a nearly unavoidable consequence of their limited stock selection pool. In contrast, small-cap funds operate with a much larger universe of over 5,000 listed stocks, with regulations requiring them to invest beyond the top 250 by market size. This broader mand

This article was originally published on January 31, 2019, and last updated on February 03, 2026.