Are Your Mutual Fund Investments Diversified? Here's How to Avoid the 33% Risk Zone Early

Many investors assume that holding multiple mutual funds automatically means diversification. But in reality, several funds often mirror each other, quietly holding the same large-cap stocks like HDFC Bank, ICICI Bank, Reliance Industries, Infosys, and SBI.

On paper, your portfolio may look well-spread, but a hidden 33% overlap can create a serious concentration risk. When one sector or stock dips, multiple funds can fall in sync, reducing the protective benefit of diversification.

Why Do Your Mutual Fund Investments Overlap?

Most equity funds are benchmarked to indices like the Nifty 50 or BSE 100. Fund managers often buy the same top 10 stocks to avoid underperforming the benchmark, a practice called index hugging.

Even if your funds are from different fund houses or follow different strategies, their top holdings can overlap significantly. The result? Your “diversified” portfolio may behave like a single, concentrated bet.

How to Spot the Overlap?

1. Check Fund Factsheets: Look at each fund’s top 10 holdings and weightages.
2. Use Simple Excel Tricks: Compare weights of common stocks and calculate the minimum for each. Sum these to find total overlap.
3. Online Overlap Tools: Some platforms provide quick overlap percentages and highlight shared holdings.

Overlap Guide:

• <25%: Healthy diversification
• 25–33%: Moderate overlap — watch your exposure
• >33%: High overlap — your funds may be clones

How to Avoid the 33% Risk Zone

• One Fund per Category: Stick to one large-cap, one mid-cap, and one small-cap fund.
• Mix Fund Styles: Combine an index fund with an active fund for the same category.
• Cap Single-Stock Exposure: Keep any one stock below 8% of total equity.
• Rebalance Regularly: Check overlaps every 6–12 months and prune redundant funds.
• Core + Satellite Approach: Build a stable core portfolio with diversified funds, and use satellite funds only for additional exposure or specific themes.

Read more: Choice Mutual Fund Filed Draft for Gold ETF With SEBI.

Conclusion

True diversification isn’t about the number of mutual funds you hold. Instead, it’s about spreading risk across different stocks and sectors. By spotting overlaps early and keeping hidden risks below 33%, you can protect your portfolio from market shocks and ensure that your investments truly work as a diversified, balanced system.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions. 

Mutual fund investments are subject to market risks. Read all the related documents carefully before investing.