Owning five mutual funds feels like the responsible, diversified thing to do. But if all five hold the same dozen stocks, you are not diversified at all. You are concentrated in disguise. This is the overlap trap, and new SEBI rules are finally forcing fund houses to reveal exactly how much their schemes overlap. Here is how to spot it in your own portfolio.
The problem with “just buy more funds”
Diversification is supposed to spread your risk. The instinct is simple: buy several funds, and if one stumbles, the others cushion you.
The catch is that many equity funds, especially large-cap ones, fish in the same small pond of top Indian stocks. Two funds with different names and different fund managers can end up holding almost the same portfolio. When that happens, buying the second fund did not spread your risk. It just doubled your bet on the same names, while you paid a second expense ratio for the privilege.
What SEBI changed
SEBI’s 2026 categorisation reform brought in rules that make overlap visible and, in specific cases, capped. Two parts matter for you.
1. Overlap caps in specific cases
SEBI has capped overlap at 50 percent in two specific situations: for sectoral and thematic funds measured against other equity schemes (with large-cap funds excepted), and for a Value plus Contra pair of funds run by the same fund house. Overlap here is computed quarterly, as an average of daily overlap values, at the individual stock (ISIN) level. Fund houses get three years to comply, or the overlapping schemes must be merged.
An important honesty check: this cap is narrow. It does not cap the overlap between, say, your large-cap fund and your flexi-cap fund, and it does not govern overlap across two different fund houses. So do not read this as “all fund overlap is now capped at 50 percent.” It is not.
2. Monthly overlap disclosure, which is the real win for investors
The change that actually helps every investor is disclosure. Fund houses now publish category-wise overlap on their websites: equity against equity, debt against debt, hybrid against hybrid. For the first time, you can look up how much two funds under the same roof actually overlap before you buy, instead of guessing.
How to check your own portfolio for overlap
You do not need to wait for the regulator. Here is a simple self-check:
- List every equity fund you own.
- Compare their top 10 holdings. Lots of repeat names is your first red flag.
- Use the overlap reports on fund house websites for funds under the same roof.
- Ask the honest question: is this new fund adding something different, or just more of what I already own?
How much overlap is too much?
Some overlap is normal, especially among large-cap funds that all hold the same market leaders. As a rough guide, within a category, overlap of 25 to 55 percent is common. When two funds cross roughly 60 percent, the second one is likely not adding real diversification. Treat that as a rule of thumb, not a hard SEBI line.
The bottom line
Diversification is about difference, not quantity. Before your next SIP, check that the fund you are about to add is not a near-copy of one you already hold. Five funds that behave like one is not a portfolio. It is a single bet wearing five labels.
Frequently asked questions
What is mutual fund overlap?
It is the degree to which two mutual funds hold the same underlying stocks. High overlap means the funds behave similarly, so owning both adds little diversification.
Did SEBI cap all mutual fund overlap at 50 percent?
No. The 50 percent cap applies only to sectoral and thematic funds measured against other equity schemes (large-cap excepted) and to Value plus Contra pairs within the same fund house. It does not cap overlap across different fund houses or across other category pairs.
How can I check overlap between my funds?
Compare the top 10 holdings of each fund and use the category-wise overlap disclosures that fund houses now publish on their websites for schemes under the same roof.
How much overlap is acceptable?
Within a category, 25 to 55 percent is common. Above roughly 60 percent, the second fund is usually not adding meaningful diversification. This is a general guide, not an official threshold.
This article is for general education only and is not investment advice. Mutual fund investments are subject to market risks; read all scheme-related documents carefully. Overlap data and fund holdings change over time.
