This article is from November 27, 2023
Many investors buy multiple equity schemes without realizing that their portfolios can overlap significantly, largely defeating the purpose of diversification. Although duplication cannot be completely eliminated, there are ways and means to reduce the possibility of duplication and achieve the goal of decentralization.
What does portfolio overlap mean in MF?Equity mutual fund schemes invest in a portfolio of stocks as per regulatory guidelines. Therefore, a large-cap fund should invest at least 80% of its portfolio in stocks ranked 1-100 by market cap, while a mid-cap fund should invest at least 65% in stocks ranked 101-250 by market cap. . Many investors consider themselves diversified and may invest their money in two or three large cap funds of different fund houses. But in reality, most of your money will be invested in the same set of underlying stocks. For example, all funds may hold the same large banks, IT companies, or diversified conglomerates. This is called portfolio overlap.
Why does portfolio overlap occur?
One of the reasons for portfolio overlap lies in Sebi's regulatory guidelines, which specify where certain categories of mutual fund schemes can invest, such as large-cap, mid-cap, small-cap and multi-cap funds. Therefore, a mid-cap fund must invest at least 65% in stocks ranked 101 to 250 by market capitalization. Because the world is finite, there will always be overlap between schemes. Wealth managers point out that portfolio overlap can also occur when holding funds from the same fund house. Every AMC has a style, approach, and philosophy for constructing their portfolio, and the set of stocks you buy in a large-cap fund may overlap with the set of stocks in your portfolio's flexi-cap, multi-cap, value, or focus schemes. there is.
How can you reduce duplication in your portfolio?
Although duplication cannot be completely eliminated, investors should try to keep it as low as possible to ensure diversification. One way to reduce portfolio duplication is to diversify your investments across fund categories. When investing in funds from different categories, the probability of portfolio overlap also decreases as the stock universe changes. For example, you can allocate 60% of your corpus to large-cap funds, 20% to mid- and small-cap funds, and 10% to sectoral funds. Another way to avoid portfolio duplication due to fund house investment styles is to invest in funds from different AMCs. This also helps diversify your portfolio.
What does portfolio overlap mean in MF?Equity mutual fund schemes invest in a portfolio of stocks as per regulatory guidelines. Therefore, a large-cap fund should invest at least 80% of its portfolio in stocks ranked 1-100 by market cap, while a mid-cap fund should invest at least 65% in stocks ranked 101-250 by market cap. . Many investors consider themselves diversified and may invest their money in two or three large cap funds of different fund houses. But in reality, most of your money will be invested in the same set of underlying stocks. For example, all funds may hold the same large banks, IT companies, or diversified conglomerates. This is called portfolio overlap.
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Why does portfolio overlap occur?
One of the reasons for portfolio overlap lies in Sebi's regulatory guidelines, which specify where certain categories of mutual fund schemes can invest, such as large-cap, mid-cap, small-cap and multi-cap funds. Therefore, a mid-cap fund must invest at least 65% in stocks ranked 101 to 250 by market capitalization. Because the world is finite, there will always be overlap between schemes. Wealth managers point out that portfolio overlap can also occur when holding funds from the same fund house. Every AMC has a style, approach, and philosophy for constructing their portfolio, and the set of stocks you buy in a large-cap fund may overlap with the set of stocks in your portfolio's flexi-cap, multi-cap, value, or focus schemes. there is.
How can you reduce duplication in your portfolio?
Although duplication cannot be completely eliminated, investors should try to keep it as low as possible to ensure diversification. One way to reduce portfolio duplication is to diversify your investments across fund categories. When investing in funds from different categories, the probability of portfolio overlap also decreases as the stock universe changes. For example, you can allocate 60% of your corpus to large-cap funds, 20% to mid- and small-cap funds, and 10% to sectoral funds. Another way to avoid portfolio duplication due to fund house investment styles is to invest in funds from different AMCs. This also helps diversify your portfolio.
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