Multiple SIPs, same stocks? How to know if your mutual funds are actually diversified

Having five or six SIPs does not necessarily mean your investments are diversified. Here’s how to identify overlapping funds and decide whether you need to consolidate.

You have five or six SIPs running every month, spread across different mutual fund schemes, perhaps even different fund houses. But does that necessarily mean your investments are diversified?

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Not quite. Several of those schemes could be investing in the same companies, leaving you with more funds but not necessarily more diversification.

“Five SIPs feels safer than two. But diversification depends on what you own, not on how many fund names appear in your statement,” says Tushar Bopche, Co-Founder and CEO, Investvalue Capital.

Why multiple SIPs may hold the same stocks

Under SEBI’s categorisation rules, large-cap funds must invest at least 80 percent of their assets in the top 100 companies by market capitalisation.

This means two large-cap funds from different AMCs may have several common holdings. Add a flexi-cap or focused fund with substantial large-cap exposure, and the duplication could increase.

Beyond a point, adding more funds may simply increase the number of schemes an investor needs to track without meaningfully changing the underlying exposure.

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How much overlap do your funds have?

Simply checking whether two schemes hold the same stocks isn’t enough. The allocation to those stocks matters too.

SEBI’s portfolio-overlap methodology considers the lower weight assigned to each common security across two schemes. The overlapping weights are then added together.

Here’s an illustration from SEBI showing how two schemes can have 45 percent portfolio overlap.

In this example, despite the two funds being separate schemes, their weighted portfolio overlap stands at 45 percent.

SEBI now also requires AMCs to disclose category-wise portfolio overlap figures on their websites every month. Investors can use these disclosures alongside individual scheme portfolios to identify duplication.

Common stocks aren’t the only thing to check

According to Bopche, investors should also examine sector concentration, market-cap allocation and investment style.

For instance, two funds may hold different banking stocks but still leave the investor heavily exposed to financial services. Similarly, several schemes following growth or momentum strategies may respond similarly to market movements.

There is no universal overlap percentage at which investors must exit a fund. What matters is whether each scheme adds a meaningfully different exposure or serves a distinct purpose.

Should you stop or consolidate overlapping SIPs?

Finding overlap doesn’t mean investors should immediately redeem their investments.

Start by identifying the role of each fund. Does it provide core large-cap exposure, add mid- or small-cap allocation, or follow a different investment strategy?

Where two schemes largely serve the same purpose, investors can assess which one to retain based on performance consistency, investment strategy, risk and costs.

“A smaller set of complementary funds, where each has a clear, distinct role, often delivers the same or better diversification than a larger overlapping set,” says Bopche.

One approach is to stop or redirect future SIP instalments first, while reviewing existing holdings separately.

Stopping an SIP does not mean redeeming accumulated units. Selling investments could trigger capital gains tax and exit loads, making an immediate exit unnecessary or costly.

Finally, even five well-diversified equity funds remain predominantly exposed to equity-market risk. An appropriate allocation to debt and other asset classes, based on financial goals and risk appetite, is equally important.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.