Investor’s 10 mutual funds held same 8 stocks, lost Rs 2 lakh in returns due to duplication; see how

As India enters a new era of mutual fund taxation from FY 2024–25 (AY 2025–26), a real-life case from Tax Buddy, a leading tax advisory platform, underscores how investors often lose returns — not because of market risk, but due to poor portfolio structure. The government’s revised capital gains tax rules for mutual funds have added another reason to rethink how investors diversify and manage their holdings.

Tax Buddy shared that their client thought more funds meant more returns. But he was wrong.

When Karan, a salaried professional, started investing in mutual funds, he believed that owning more funds meant higher returns. Over five years, he spread his Rs 10 lakh portfolio across 10 mutual funds, assuming that a wide spread would lower risk and increase performance.

But when Tax Buddy reviewed his portfolio, they found that 65% of his holdings were concentrated in the same eight stocks — appearing repeatedly across different schemes.

The result: Rs 2 lakh in potential returns lost over five years due to duplication and over-diversification.

“Most Indian equity mutual funds share between 55% and 70% of the same top holdings,” explained a Tax Buddy analyst. “Once you own four to five funds, the benefit of diversification starts flattening out. Beyond that, you’re only adding complexity, not performance.”

The platform used the case to highlight a common investor misconception — that more funds automatically mean more safety. In reality, over-diversification often mirrors the same underlying portfolio multiple times, diluting returns and increasing tracking difficulty.

The smarter way to diversify

Tax Buddy’s experts suggest that three to four mutual funds are enough for optimal diversification. The key is to balance growth, stability, and tax efficiency rather than chase past performance.

Ideal Portfolio Mix (Rs 10 lakh example):

Rs 2 lakh — ELSS Fund (Tax savings + equity exposure)

Rs 3 lakh — Multi-cap Fund (Core growth engine)

Rs 2 lakh — Aggressive Hybrid Fund (Equity + debt balance)

Rs 3 lakh — Large & Mid-cap Fund (Quality + growth blend)

Optional: Add a Debt Fund (short duration or dynamic bond) for liquidity and capital protection.

This structure covers all market segments, limits overlap, and balances long-term returns with volatility — aiming for a 10–12% CAGR over 7–10 years.

Pro Tip: Before adding a new fund, check the top 10 holdings of your existing schemes. If there’s over 50% overlap, skip it.

New mutual fund tax rules

The government’s new tax framework changes how mutual fund gains are classified and taxed.

Equity Mutual Funds (≥65% equity exposure):

STCG: Sold within 1 year → taxed at 20% + cess

LTCG: Held beyond 1 year → taxed at 12.5%, with a ₹1.25 lakh annual exemption

Non-Equity Funds (Debt, Gold, Hybrid

Bought after April 1, 2023: Gains taxed at slab rates regardless of holding period

Held for over 2 years (before April 1, 2023 purchases): LTCG taxed at 12.5% without indexation

Hybrid funds with ≥65% equity: Taxed as equity; others follow slab rates

ETFs: LTCG at 12.5% after one year; short-term gains at slab rate

From April 1, 2025, debt funds with over 65% exposure to debt instruments will qualify as debt mutual funds. Their LTCG will be taxed at 12.5% after two years, while short-term gains remain slab-based.

Takeaway

With new tax rules reshaping mutual fund returns, tax efficiency and diversification discipline are now critical. Karan’s case is a warning for investors — owning too many funds doesn’t reduce risk; it multiplies redundancy.

As Tax Buddy’s advisors put it: “A well-structured, tax-aware portfolio of 3–4 funds can outperform a cluttered mix of 10. The key is clarity, not quantity.”