Equity Fund Overlap Undermines Diversification for Indian Investors

A recent study has revealed significant portfolio overlap among several Indian equity mutual funds, even across ostensibly different fund categories. The analysis highlights instances where funds from the same Asset Management Company (AMC) exhibit substantial commonality in their underlying stock holdings, challenging the conventional wisdom of diversification through multiple fund investments. Specifically, the BOI Large & Mid Cap Fund and the BOI Multi Cap Fund, both managed by Bank of India Investment Managers, were found to have a striking 79.4% overlap in their portfolios. This means that nearly four-fifths of the stocks held by one fund are also present in the other, despite their categorization implying distinct investment mandates – one focusing on a blend of large and mid-sized companies, and the other on companies across all market capitalizations. This phenomenon extends beyond just these two funds, suggesting a broader trend within the Indian mutual fund industry. The implication for investors is critical: simply allocating capital across multiple equity mutual funds, even those labeled differently, may not achieve the intended diversification benefits. Instead, investors could inadvertently be concentrating their exposure to a similar set of equities, thereby increasing portfolio risk rather than mitigating it. From an economic perspective, this lack of genuine diversification could lead to sub-optimal risk-adjusted returns for retail and institutional investors. If a particular segment of the market or a set of common stocks underperforms, portfolios with high overlap would experience magnified losses. This insight is particularly pertinent in a market like India, where retail participation in mutual funds has been steadily increasing, often driven by the promise of professional management and diversification.