When mutual fund schemes in your portfolio are twins

Remember Hindi movies with double-roles? Your parents will tell you about fantastic performances in Ram Aur Shyam, Seeta Aur Geeta, while your friends may regale you with Chandni Chowk to China, and Rowdy Rathore story-twists. In the world of financial investments too, double-roles are not uncommon. Mutual fund investors buy units in schemes that represent a portfolio of investments. When two or more funds have a high degree of portfolio similarity, owning them doesn’t really get you any real diversification because your money ends up going into the same set of stocks.

A Morningstar study across top 14 mutual fund houses, with a good chunk of equity assets at end of February 2017, shows that in specific schemes there is high portfolio holding similarity among funds belonging to the same parent fund-house.

For instance, Birla Sun Life Tax Relief 96 and Birla Sun Life Tax Saving schemes have over 90% holding similarity. In the case of Birla Sun Life Frontline Equity and Birla Sun Life Top 100 funds, the similarity is 78%.

In DSP BlackRock MF, scheme sets like DSP BlackRock Focus 25 & DSP BlackRock Top 100 Equity, and DSP BlackRock Opportunities & DSP BlackRock Tax Saver have over 75% similarities. In the case of Franklin Templeton MF, Franklin India Bluechip portfolio and Franklin India Prima Plus portfolio have over 70% resemblance. The similarity between Franklin India Flexi Cap and Franklin India Taxshield is close to 80%.

“Twins” with over 60% holding similarity include Kotak Opportunities & Kotak Select Focus, L&T Equity & L&T Tax Advantage, Reliance Tax Saver & Reliance Vision, Tata Equity Opportunities & Tata India Tax Savings, and UTI Mastershare & UTI Opportunities.

Interestingly, many of these schemes are overseen by the same fund manager. This can mean either of two things: either the fund-house is supremely confident about the stocks so same stocks are present in different schemes or it is plain lazy in terms of investment research for seeking new opportunities.

Asset management companies (AMCs) tend to run multiple funds/ strategies with differing mandates- large cap, flexi cap, small & mid cap, tax saving funds, which cater to different investors risk/return needs. The asset manager’s best stock ideas form a part of these portfolios.

“There will typically be a fair bit of overlap between large and flexi-cap funds of the same AMC, as their highest conviction large-cap stocks appear in both portfolios (albeit in different weights). The only difference being that flexi-cap funds will have a higher weightage for midcap stocks,” Kaustubh Belapurkar, director of fund research, Morningstar India told DNA Money.

AMCs also offer ELSS (tax saving) schemes, which offer benefits under 80C of the I-T Act. These funds may have a fair bit of overlap with another fund from the AMC, he said. In certain cases, the fund may run diversified as well as a concentrated strategy investing into similar stocks. These two funds may have a large overlap, the difference being the concentrated strategy takes large positions into the highest conviction stocks. These funds tend to be riskier and cater to a niche and more-savvy investor, says Belapurkar.

Personal finance experts want investors to understand diversification and act accordingly. In simple terms, diversification means reducing risk by spreading out your investments. So, when two funds have a high degree of holding similarity, the original purpose of seeking diversification gets defeated. “If somebody gets Rs 50,000 they invest Rs 10,000 across four different schemes. They may think that they have achieved diversification, by not putting all eggs in one basket. But in reality, it’s not so. If you really want to diversify, you must diversify across fund managers and also their investment style. This will ensure true diversification,” says Manoj Nagpal, CEO, Outlook Asia Capital.

Some experts point out that unfortunately historical track-records and fund manager names carry more weight than the fund portfolio. “If two funds have over 80% portfolio similarity, this means they are really not that different. It’s almost like having twins. Because they rely on the same set of stocks, they will both mirror each other’s movements. If you wanted the same to happen, it would have been much better to put all the money in just one fund,” says Sudipa Datta, a financial consultant.

A senior fund industry official said that these days fund managers are becoming extremely conscious of portfolio overlap.

“Anyone can assess the same by studying top holdings across schemes. Ideally, each portfolio should have its own mandate and the style and that should be different from anything else they already have. So, if the fund manager is bullish on the same theme, care should be taken to buy a different stock from the same theme for the other funds as per their respective mandates,” he says.