Mutual funds are one of the most popular investment tools because of ease of investment, multiple choices of investment strategies, the relative safety shield due to diversification and the option to choose from a variety of sectors and asset classes.
A good number of investors, over time, end up with too many mutual fund schemes in their portfolio due to periodic reviews and rebalancing of the portfolio. Another prominent factor for portfolio swelling is addition of NFOs that promise unique strategies, but turn out to be a collection of the many stocks already available in the portfolio.
How portfolio overlap kills your returns
Many Indian investors confuse quantity with quality, ending up with overinvested, overlapping portfolios that drain returns through hidden costs and create a false sense of security.
The damage is twofold. First, when these common stocks fall, your entire portfolio falls together, defeating the very purpose of diversification.
“Each mutual fund charges its own expense ratio, so when multiple funds hold the same stocks, investors end up paying multiple management fees for similar exposure,” explains Nikunj Saraf, CEO, Choice Wealth. “This silently eats into returns over long periods. While a single fund’s expense ratio may look reasonable, the portfolio-level cost can be much higher due to duplication.”
Simplifying the portfolio by consolidating overlapping schemes lowers total costs and improves net returns without altering the overall risk profile, he adds.
How to identify if your portfolio is overlapping or overconcentrated?
If you believe that your mutual fund portfolio might have overlap, there are two easy ways with which you can identify the same:
1. The factsheet method
“The simplest method is to open the monthly factsheets for your mutual funds. Look specifically at the ‘Top Holdings’ section. If you see the same names appearing everywhere like Reliance Industries, HDFC Bank, or Infosys, that is a red flag. You aren’t diversified; you are just buying the same stocks through different schemes,” says Kshitiz Jain, CFA, FRM.
Download the factsheets of all your funds and compare them side by side. If you see the same companies appearing repeatedly, you’ve found overlap.
2. Use digital tools
For a faster diagnosis, use portfolio analysis tools available on platforms like Zerodha Coin or Groww. Some even show sector-wise concentration, letting you see if you’re too heavily invested in banking, IT, or any other sector.
“Upload your holdings, and the tool will calculate exactly how much your funds overlap. Once you see the numbers, you can move to fixing the problem,” advises Jain.
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How to trim an overconcentrated mutual fund portfolio?
Once you’ve identified the problem, it’s time to act. But trimming a portfolio isn’t about selling funds randomly, it requires strategy.
One champion from one category
“Holding four different large-cap funds doesn’t make you safer,” says Jain. “In most cases, consolidate your money into the single fund in that category.”
Pick the best-performing, most consistent fund in each category and let the others go.
“Start by mapping top holdings and sector weights, then retain only one strong fund per category based on consistency and cost. A lean portfolio with fewer, high-conviction funds is easier to manage, reduces behavioural mistakes and delivers more predictable outcomes than a cluttered one,” Saraf echoes.
The only exception is if you’re holding funds with genuinely different investment styles, like one growth-focused fund and one value-focused fund, to balance across market cycles.
Diversify across fund houses
Don’t put all your mutual fund eggs in one AMC’s basket.
“Different Asset Management Companies (AMCs) have different investment philosophies and research teams,” notes Jain. “If you buy all your funds from one AMC, you are exposed to their specific ‘house view.’ Buy across different fund houses to get true diversification.”
Your entire portfolio shouldn’t suffer because one fund house makes a bad call on a sector or gets caught in a scandal.
Also Read: EPF vs PPF vs NPS: Which retirement investment works best for you?
How to prune your mutual fund portfolio without the tax pain?
Once you have identified the funds which need to be removed, how do you exit them without getting hit by a massive tax bill?
Check the timings to minimise the cost
If you make an abrupt exit, you may end up with many unintended costs. So before finalising your exit, it makes sense to check the cost that you will have to pay just because of the time of your exit. First find out about the exit load. Many mutual funds charge up to 1% exit load if you exit from investment within a year. If possible, it is better to complete a year before exiting a fund to avoid paying a huge cost.
Maximise the advantage of Rs 1.25 lakh LTCG exemption
Timing is also important from the taxation angle. If your investment completes one year, you will get LTCG exemption of Rs 1.25 lakh on equity MFs and a lower tax rate of 12.5% on the remaining gains. However, if you exit before that, you will end up paying a much higher STCG tax at 20%. So, a little waiting can help you save big.
“The Rs 1.25 lakh annual LTCG exemption allows investors to book gains gradually without paying tax,” explains Saraf.
For e.g., if you have Rs 5 lakh invested in a fund that’s grown by 25%, your gain is Rs 1.25 lakh. You can redeem the entire amount, book the gain, and reinvest in a better fund, all without paying tax.
You can spread your redemption into multiple financial years so that you can utilise the Rs 1.25 lakh LTCG exemption each year and maximise tax efficiency of your investments. At the end of the financial year, this can be done with an interval of 2-3 months. For instance, if you redeem now you can get Rs 1.25 lakh LTCG exemption in FY 2025-26 and if you go for another redemption in April, you would again qualify for another Rs 1.25 lakh LTCG exemption for FY 2026-27.
So, spreading redemptions through the year reduces market-timing risk and allows reinvestment at a higher cost base earlier, explains Saraf.
Many investors procrastinate and rush to harvest gains in the last week of March.
“Waiting until March can expose investors to volatility and rushed decisions,” notes Saraf. “A staggered, calendar-based approach works best.”
Using SWP for gradual exits
“Systematic Withdrawal Plans (SWPs) allow investors to redeem investments in a tax-efficient and disciplined way,” says Saraf.
For those who want to trim a large investment slowly, a Systematic Withdrawal Plan may work, but with an important caveat.
Each withdrawal consists partly of principal and partly of capital gains, and tax applies only to the gains portion. For example, if Rs 10 lakh grows from Rs 6 lakh and an SWP of Rs 50,000 is set up, roughly Rs 20,000 is treated as gain and Rs 30,000 as principal, he explains.
“If the holding is long-term and total annual LTCG stays within limits, tax can be minimal or zero. Over time, as gains accumulate, the taxable portion gradually increases,” he adds.
However, using SWP only makes sense when you’re trimming a good fund gradually for rebalancing purposes. If a fund is genuinely bad, then exiting promptly is ideal.
“The opportunity cost of staying in a bad fund is almost always higher than the tax bill. Sell the underperformer and move the capital to a winner,” says Jain.
Can family transfers help?
Some investors consider transferring funds to family members to manage taxes. This works, but only in specific situations.
“Tax rules around family transfers are strict,” warns Saraf. “If investments are transferred to a spouse or minor child without consideration, any income or gains are usually clubbed back to the original investor. However, transfers to adult children are not subject to clubbing, making them a legitimate route for long-term tax planning.”
The key is proper documentation. Transfers must be genuine and well-documented, as artificial arrangements may invite scrutiny from tax authorities.
How many funds do you really need?
“A cluttered portfolio dilutes your returns,” warns Jain. “You don’t need to collect funds like stamps. A focused portfolio of 5-8 well-chosen funds is enough for most investors.”
More funds don’t mean better diversification. A lean, well-structured portfolio is easier to track, rebalance, and understand. More importantly, it forces you to choose quality over quantity.