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Diversification is Key to Avoiding Mutual Fund Stock Overlap

Mutual fund stock overlap is the amount of stock, say of Microsoft, owned by all mutual funds in your portfolio. Asset allocation needs to be considered if mutual funds form part of an investor’s total investment. An easier way to find out what stock each of your mutual funds is investing in is to go through the half-yearly and annual reports. These reports declare all the stocks the mutual funds have invested in.

Fund Overlap

It is possible that even after taking a look at the stocks in your fund, you may have not calculated the amount of mutual fund sock overlap that exists. Chances are that you are holding the stocks of one company in varied forms like value fund, a balanced fund, global fund, growth fund, technology fund. For example, you could have investments in a growth fund and a technology fund of Microsoft. But it could have been technology that has contributed to growth, which means that your stocks in technology just doubled.

Unfortunately, stock overlap is quite common while looking for a diversified portfolio which ends up holding same stocks in one major holding. Most experts feel that it is easy to end up getting stock overlap in large and varied portfolio. However, the goal should be not to have too much mutual fund stock overlap.

For a ‘not to proficient’ investor, the annual report is a more interesting document than the prospectus given by the fund management. In the annual report you can see what you have invested in. Mutual fund stock overlap is neither good nor bad. Overlap happens as fund managers happen to like certain companies for the obvious reasons.

That’s why blue chip companies are held by numerous funds. The easiest way to avoid overlap is to take a closer look at the holdings in a portfolio, and if there is too much of overlap, take action to reduce it. Knowledge of holdings in a portfolio and the extent of overlap might make all the difference in earning good returns and reducing the losses when the market swings.

If the investor realizes that there is mutual fund stock overlap in the portfolio he/she holds, he/she should realize that they are at a risk of losing. Such investors should look as quickly as they can on an orderly basis to diversify their holdings as the key to successful investing is diversification.