More mutual funds don’t always mean better diversification: How to avoid the portfolio overlap trap

A well-diversified portfolio is built by combining different asset classes, investment styles, and market segments, and not by investing in multiple mutual funds.

According to Aditya Agarwal, Co-Founder, Wealthy.in, investors should focus on the role each fund plays in the portfolio rather than the total number of schemes they own.

Agarwal explains, “Fund count and diversification are not the same thing. Diversification improves when a portfolio gains exposure to different asset classes, market-cap segments, investment styles, geographies or risk factors.”

“If the new fund invests in the same set of stocks, sectors and themes that are already present in the portfolio, the investor may be buying repetition rather than diversification,” he adds.

According to Agarwal, investors should watch out for style drift and hidden duplication.

Yet all four schemes may currently have significant exposure to financials and technology companies and many of the same 20–30 large-cap stocks.

Instead of looking only at fund categories, he suggested that investors should review:

Agarwal believes investors should ask what additional role a new fund will play before investing.

“A new fund should ideally bring something genuinely different—such as international exposure, a debt allocation for near-term goals, a gold component for diversification, or a clearly differentiated style exposure—not just another version of the same India large-cap equity basket,” he said.

In other words, every new investment should fill a gap in the portfolio rather than duplicate existing exposure.

Agarwal highlighted that owning several funds also makes it harder to monitor investments.

For example, a ₹25,000 monthly SIP divided equally across 5 funds may still remain manageable if each scheme serves a specific objective.

Agarwal concludes that investors should measure diversification by the difference in exposure rather than by the number of mutual funds they own.

Before adding another fund, investors should assess whether it reduces portfolio concentration, improves diversification across asset classes, market caps or investment styles, and aligns with a specific financial goal.

According to him, a compact portfolio of 5 to 6 well-selected funds can often provide better diversification than owning 10–12 overlapping schemes, provided each holding has a clear and distinct purpose.