What is Mutual Fund Overlap and How it could affect Investors?
A mutual fund is a collection of investments that takes money from investors to buy securities such as bonds, stocks, and short-term debt. Mutual funds provide many benefits, but investors face a challenge called mutual fund overlap.
Mutual fund overlap happens when two or more mutual funds in an investor’s portfolio have the same or similar investments. The overlap can reduce the diversification advantages that mutual funds usually offer because it increases focus on some stocks, sectors, or asset classes.
How Mutual Fund Overlap Can Affect Investors?
The main objective of investing in mutual funds is diversification. Overlap goes against this objective by putting money into similar securities.
Higher visibility of the same securities or sectors increases losses at the time of market downturns.
Overlap can result in holding unnecessary investments, making the portfolio less effective in balancing risk and return.
Overlapping funds makes it difficult to see the actual investment of specific stocks or sectors.
How can investors check for overlap in their mutual funds?
Investors should review the portfolio of their mutual fund, which is usually listed in monthly or quarterly fact sheets, and should look for common stocks or securities held in more than one fund.
There are many financial websites and investment platforms that have tools to check mutual fund overlap.
Investors should check the sectoral allocation of their funds. Major overlap in different sectors, like finance or technology, can indicate a lack of diversification.
Professional experts can analyze your portfolio for overlap and suggest changes to increase diversification.
Investors focus on minimizing the mutual fund overlap to maintain effective diversification. Investors can minimize the mutual fund overlap by spreading investments in various fund categories.
