Recently I wrote a post “Top 10 Best Mutual Funds to invest in India for 2015” and a reader commented that he is investing in two funds called HDFC Top 200 and HDFC Equity. He asked my opinion. I found that 72% of his investments in these two funds overlap. So is it a better investment?
Usually mutual fund investors choose funds based on star ratings or recent performance. They try to invest in those funds, which are top rated and given high return. By concentrating on this activity, they usually select funds from the same category like 2-3 large cap funds. However, what about the underlying sector or stock? If these 2-3 funds invest in the same sector or stocks, then what purpose it servers to hold 2-3 funds? Therefore, it is very much important to check overlapping, especially for stocks.
Few also commented that by investing in different AMCs (Mutual Fund Companies) they feel it as diversification. Here again, they forgot the underlying stocks. Now the question is, where one can check this overlapping of the portfolio? The answer is Mr. Pattu of freefincal.com. He developed this Excel calculator long back, but now I found it very much necessary to share with you all.
Once you open this calculator, then on first sheet you need select the funds you are investing and along with that investment value. If you enter the investment value as of your SIP amount then it will show you the overlap investment in each SIP. Otherwise, if you enter the total current value of the fund, then result will show the overlapping to entire portfolios. Here you have the option to choose maximum three funds. I requested him to create more option. Because I found that many investors hold around 4-5 funds. However, he suggested that by doing so it might create confusion among investors. It is true also. If you have more than three funds, then select three funds each time to know about overlapping of investments. For understanding purpose, I selected HDFC Top 200 Fund and HDFC Equity Fund.
When you click on the tab “Click to compare,” then the results will be in next sheet called “Results-Simple” and “Results-Advanced.” In “Results-Simple” sheet, you will find overall overlap percentage among funds. In this example, the overlap is 72%. It also shows the number of stocks each fund holding. In the same sheet, you also find the sector wise holding of each fund in a graphical view.
In “Results-Advanced” sheet, you will find the percentage of holding in each stock by the fund. This gives a clear indication of how much stock your mutual fund portfolio holds. For example, if we invest Rs.20, 000 between HDFC Top 200 Fund and HDFC Equity Fund by dividing equally of Rs.10, 000 in each fund, then our investment in SBI alone will be Rs.1, 916. This gives a clear indication of a risk involved in exposing ourselves in particular stocks.
So how much overlapping is good?
There is no thumb rule. However, minimizing the overlapping is best idea to diversify. Ideally restrict to around 30% to 40%.
Download the Calculator HERE. Also let us say a big thanks for Mr.Pattu for creating such wonderful calculators.