More mutual funds don’t always mean better diversification: How to avoid the portfolio overlap trap
A well-diversified portfolio is built by combining different asset classes, investment styles, and market segments, and not by investing in multiple mutual funds.
According to Aditya Agarwal, Co-Founder, Wealthy.in, investors should focus on the role each fund plays in the portfolio rather than the total number of schemes they own.
More funds can create a false sense of diversification
Agarwal explains, “Fund count and diversification are not the same thing. Diversification improves when a portfolio gains exposure to different asset classes, market-cap segments, investment styles, geographies or risk factors.”
“If the new fund invests in the same set of stocks, sectors and themes that are already present in the portfolio, the investor may be buying repetition rather than diversification,” he adds.
Fund labels alone do not guarantee diversification
According to Agarwal, investors should watch out for style drift and hidden duplication.
He notes that an investor may own:
- A large-cap fund
- A flexi-cap fund
- A focused fund
- A value fund
Yet all four schemes may currently have significant exposure to financials and technology companies and many of the same 20–30 large-cap stocks.
Instead of looking only at fund categories, he suggested that investors should review:
- Portfolio composition
- Sector weights
- Market-cap mix
- Top holdings
Every new fund should have a clearly defined purpose
Agarwal believes investors should ask what additional role a new fund will play before investing.
“A new fund should ideally bring something genuinely different—such as international exposure, a debt allocation for near-term goals, a gold component for diversification, or a clearly differentiated style exposure—not just another version of the same India large-cap equity basket,” he said.
In other words, every new investment should fill a gap in the portfolio rather than duplicate existing exposure.
Too many funds can make portfolio management difficult
Agarwal highlighted that owning several funds also makes it harder to monitor investments.
For example, a ₹25,000 monthly SIP divided equally across 5 funds may still remain manageable if each scheme serves a specific objective.
However, spreading the same amount across 8 or 10 funds may:
- Reduce the impact of each investment
- Make portfolio reviews more time-consuming
- Shift attention toward individual fund performance instead of overall asset allocation and risk profile
- Make it harder to stay focused on financial goals
Focus on meaningful diversification, not the number of schemes
Agarwal concludes that investors should measure diversification by the difference in exposure rather than by the number of mutual funds they own.
Before adding another fund, investors should assess whether it reduces portfolio concentration, improves diversification across asset classes, market caps or investment styles, and aligns with a specific financial goal.
According to him, a compact portfolio of 5 to 6 well-selected funds can often provide better diversification than owning 10–12 overlapping schemes, provided each holding has a clear and distinct purpose.
Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
About the Author
Sheetal Goel is a Content Producer at Livemint, where she covers corporate developments, personal finance, business trends, markets, and SEBI-related updates. She focuses on simplifying complex financial concepts and presenting them in a clear, reader-friendly manner, thereby helping audiences better understand investment trends, personal finance, and market developments. Her writing focuses on making finance more accessible to everyday readers while maintaining clarity, accuracy, and relevance.
She holds a degree in Economics (Hons.) along with an MBA in Finance, which has helped her develop a strong foundation in financial analysis, market understanding, and business reporting. Before joining journalism, she worked with finance and broking firms, where she closely followed market developments, investment strategies, and evolving industry trends. This practical exposure strengthened her understanding of financial markets. She has also written content across multiple formats and platforms, including YouTube, LinkedIn, and Instagram.
Over time, she has developed expertise in covering market-linked stories, investor-focused topics, and regulatory updates in a simplified yet informative style. She also enjoys reading and listening to Hindi poetry, reflecting her appreciation for literature and creative expression beyond the world of markets and numbers.
