By Santosh Kumar Somebody showed me a portfolio last month with eleven equity mutual funds in it. Eleven. Four large-cap, three flexi-cap, two “focused”, a couple of thematic ones. He was proud of it, and his reasoning was the reasoning everybody has: more funds, more spread, less risk.
Then we put the holdings side by side. The same seven or eight stocks turned up in almost every scheme, usually near the top of the list. He did not have eleven portfolios. He had one portfolio, bought eleven times, with eleven sets of expense ratios attached.
Why Different Mutual Funds End Up Holding the Same Stocks
This is not a coincidence or a sign of lazy managers. It is structural.
Large-cap mutual funds are required to keep most of their money in the hundred biggest listed companies. There are only so many ways to do that. Every large-cap manager is fishing in the same pond, with the same handful of very large fish, and a benchmark they are measured against that is dominated by those fish. Deviate too far and you risk underperforming the index for reasons your investors will not forgive.
Flexi-cap and multi-cap funds have more freedom on paper. In practice, most of them hold a large-cap core that looks remarkably similar to a large-cap fund, because that is where the liquidity is and where a big fund can actually deploy money.
So when you buy large-cap and flexi-cap mutual funds from two different fund houses and feel diversified, what you have often done is buy the same twenty stocks twice, with the second fund adding a thin layer of mid-caps on the edge.
How Overlapping Holdings Hurt Your Portfolio
Three things, and none of them are good.
It flattens your returns toward the index while you keep paying active fees. If five of your funds each hold the same bank and the same IT company as their top positions, your combined portfolio is not five managers’ best ideas. It is one idea, weighted heavily, and whatever those managers do differently gets diluted by everything they do the same.
It hides concentration. You can be holding a single stock at a much larger share of your total money than you realise, because it sits at a few percent in each of several funds and nobody adds it up for you.
And it makes the portfolio impossible to reason about. Which of your mutual funds do you sell when one disappoints? The honest answer, when they all hold the same things, is that it barely matters.
How to Spot Overlap Across Your Mutual Funds
You do not need a tool, though several free ones exist. Take the top ten holdings of each fund, which every fund house publishes monthly, and put them in a spreadsheet. Count how many names repeat.
Here is roughly what the picture tends to look like for a typical “diversified” set:
| Pairing | What usually happens | Does it add anything? |
| Two large-cap funds | Heavy overlap in the top holdings | Very little |
| Large-cap and flexi-cap | Large overlap in the core, some difference at the edges | A bit, mostly from the mid-cap sleeve |
| Large-cap and mid-cap | Minimal overlap by design | Yes, that is real diversification |
| Flexi-cap and small-cap | Little overlap | Yes |
| Two index funds on different indices | Depends entirely on the indices | Check the constituents before assuming |
The pattern is obvious once you lay it out. Diversification comes from funds that are forced, by mandate, to hold different things. It does not come from funds that happen to have different names.
Why Fewer Mutual Funds Can Mean Better Diversification
I would rather see four mutual funds that genuinely disagree with each other than eleven that quietly agree.
A workable core is one large-cap or index fund, one mid-cap or small-cap fund for the part of the market the first one cannot reach, and possibly one flexi-cap or international fund for the manager’s judgement or geographic spread. That already covers more ground than most eleven-fund portfolios, at a fraction of the fee drag, and you can actually tell what each piece is for.
If you want to add a fifth, ask one question before you do: what does this hold that nothing I already own holds? If the answer is “the same things, in a slightly different proportion”, you are not diversifying. You are collecting.
Conclusion
The eleven-fund investor sold down to four. His top ten stocks barely changed, which was rather the point, and his fees fell noticeably. He was, by any sensible measure, better diversified than before with fewer schemes, because the ones that remained were doing different jobs.
Mutual funds are tools for spreading risk. But the spreading happens inside the fund, not by piling up funds that all reach for the same stocks. Count the funds less. Count the overlap more.