For example, if you invest in two large-cap equity funds, chances are they both hold similar blue-chip stocks. This means your portfolio isn’t as diversified as you think. In a market downturn, overlapping holdings can amplify losses instead of cushioning them.
Why is portfolio overlap important?
- Risk Concentration: Overlap increases exposure to the same companies or sectors.
- Reduced Diversification: The purpose of holding multiple funds is defeated.
- Performance Impact: If overlapping stocks underperform, multiple funds suffer.
Now, where does a Liquid Fund fit into this discussion? Liquid funds invest in short-term debt instruments and are designed for parking surplus cash with minimal risk. Including a liquid fund in your portfolio can offset the risk of equity-heavy holdings and provide quick access to cash. While liquid funds don’t directly affect portfolio overlap in equities, they add stability and liquidity—two essential components of a balanced portfolio.
How to manage portfolio overlap:
- Use online tools to check overlap between funds.
- Avoid investing in multiple funds from the same category.
- Add non-equity options like liquid funds for better balance.
In short, portfolio overlap is a silent risk that many investors overlook. By monitoring overlap and incorporating low-risk options like liquid funds, you can build a portfolio that truly diversifies and protects your wealth.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.