What to do if your Mutual Fund portfolio has massive overlaps

Turns out five funds can be one fund wearing five names. Here’s the check that actually catches it and why it only shows up in a crash.

I once went through my kitchen pantry expecting variety and found something else instead. Five different packets of chips, five different brands printed on the front, and five different flavors claimed on the label. Then I flipped them over. Same manufacturer. Same oil. Same base ingredients, just repackaged with a different name and a different mascot on the front.

It looked like a shelf full of choices. It was actually one product wearing five costumes.

I think about that pantry a lot now, because the exact same thing happens with mutual fund portfolios, and it’s far easier to miss there than it is with a packet of chips, since nobody flips a mutual fund over to check what’s actually inside it. What “Diversified” Actually Means

Diversification is the idea that holding several different investments protects you, because if one falls, the others might not fall with it or might not fall as much. That’s the whole point of spreading money across multiple funds, stocks, or strategies instead of putting it all into one.

The word doing the real work in that sentence is “different.” Five funds only protect you the way five different chips could, flavors would if they were actually built from different ingredients. Five funds that are all secretly holding the same twenty large companies, just arranged in slightly different proportions, aren’t five different investments. They’re one investment, wearing five names.

How This Actually Happens Without Anyone Noticing

Nobody sets out to build a repetitive portfolio on purpose. It usually happens gradually. Someone starts with one large-cap mutual fund, often after weighing whether mutual funds or direct equity suit them better. Later, they add a second fund from a different company, thinking it adds variety. Then a third, maybe a flexi-cap fund this time, for good measure. 

The problem is that many large-cap and flexi-cap funds in India can end up holding a fairly similar set of the biggest, most liquid companies, simply because there are only so many large, well-established businesses to choose from at that size. Fund managers across different companies sometimes end up owning overlapping names in comparable weights, since those are often the companies considered safest and most liquid to hold at scale. This doesn’t happen with every fund pairing, but it happens often enough to be worth actually checking rather than assuming.

So an investor holding three “different” large-cap-oriented funds might actually be holding the same handful of companies three times over, just packaged under three different fund names, exactly like five chip packets from one factory.

Where This Actually Gets Dangerous: During a Stress Event

In an ordinary, calm market, this overlap barely matters. It becomes a real problem specifically when something bad happens to the market as a whole, because that’s when correlated investments stop pretending to be different and start moving together, in the same direction, by similar amounts.

The Nifty 50 fell close to 38% between its January high and its March low in 2020, as COVID hit global markets. Almost every equity fund fell during that stretch, overlapping or not, because a market-wide crash pulls down equity investments broadly. That part isn’t unique to overlapping funds.

Here’s where the overlap actually shows its cost: an investor holding three genuinely different funds, spread across large-cap, mid-cap, and a non-equity asset like debt or gold, would likely have seen some cushioning, since not every part of that mix falls by the same amount at the same time. An investor holding three large-cap funds that all quietly held the same twenty companies got no such cushioning. All three positions fell in near lockstep because there was really only one underlying position spread across three statements, not three separate ones. The crash didn’t create the overlap. It just removed the one thing, calm markets, that had been hiding it.

This is the part that makes correlation risk genuinely tricky: it hides during good times and only reveals itself at exactly the moment you need real protection.

A Simple Way to Actually Check

You don’t need to be a portfolio analyst to catch this. A few honest questions do most of the work:

1. Do your funds hold the same top 10 companies? Most fund fact sheets list their top holdings. If three of your funds all list the same five or six companies near the top, that’s a real overlap, not a coincidence.
2. Are all your funds tilted toward the same sector? A portfolio heavy in IT and banking stocks across every single fund isn’t diversified by sector, no matter how many separate fund names appear on the statement.
3. Did everything fall together during a past downturn? Look back at how each investment performed during a known stress period, like March 2020. If every single one dropped by a similar percentage at the same time, that’s the correlation showing itself.

None of these questions require advanced math. They require actual looking; the way flipping over a chip packet requires nothing more than turning it around.

What Real Diversification Actually Looks Like

Genuine diversification isn’t about how many funds sit in your portfolio. It’s about whether they actually respond differently when something happens. Three funds spread across large-cap, mid-cap, and something like gold or debt will usually behave more differently from each other than ten funds that all quietly hold the same large-cap names. Fewer funds, real exposure differences, that beat more funds wearing different labels every time. It can also mean not ending up concentrated in the same sectors or companies across every fund without realising it, which is easy to miss when you’re just counting fund names instead of actually looking inside them. 

It’s not about holding more things. A portfolio with three genuinely different holdings offers more real protection than one with ten overlapping ones. Quantity was never the point. The difference was.

Where This Leaves the Actual Check

The pantry test still applies here better than most financial jargon does: if you can’t tell your holdings apart once you actually look inside them, past the name on the label, they’re probably not offering the protection you think they are. The label was never the thing that mattered. What’s actually inside always was.

If you want to check what’s genuinely inside your own portfolio rather than assuming, you can explore Rmoney’s investment platform to research individual funds before deciding, so you can run the same top-10-holdings and sector-concentration check yourself: he same flip-the-packet-over logic, just applied to real fund data instead of guesswork. 

For more on building a genuinely diversified mutual fund portfolio, Rmoney’s mutual funds blog section covers this in more depth.

Disclaimer: This blog is for educational purposes only and should not be considered financial advice or a recommendation to invest. Portfolio diversification does not guarantee returns or protect fully against loss. Please consult a SEBI-registered investment advisor before making any investment decisions.