Ritesh Sabharwal CFP®

W.M.W #33: 18 Mutual Funds Didn’t Make Her Richer. They Made Her Poorer.

Reading time: 5 minutes - January 31, 2026

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Hey Reader

Last week, my friend Ankita proudly showed me her mutual fund portfolio:
​Ankita: Look at this! I've diversified perfectly. I have 18 mutual funds across different AMCs. My portfolio is bulletproof!
​Me: That's not diversification. That's di-worse-ification.
​Ankita: What do you mean? More funds = more diversification, right?
​Me: Let me check something.

I opened a portfolio overlap tool and analyzed her 18 funds.
​The result: 14 out of 18 funds held the same 25-30 stocks. Her "diversified" portfolio had 65% overlap.
​Meaning: She was paying 18 expense ratios to essentially own the same portfolio 14 times over.
​Her reaction: Stunned silence.

The Over-Diversification Trap: A Real Example

Let's start with Ankita's actual portfolio (I've simplified the numbers):

Her 18-fund portfolio:

What I found:

Using a portfolio overlap calculator, ICICI Prudential Bluechip Fund and SBI Bluechip Fund show moderate overlap of 47%, meaning they share 31 stocks.

Ankita's overlap analysis:

• Her 4 large-cap funds had 62% overlap (owned almost identical stocks)
• Her 5 flexi-cap funds had 48% overlap
• Her 2 sectoral funds (Banking + IT) had 65% overlap with her large-cap funds

The shocking truth:

Out of 18 funds, she effectively owned only 4-5 distinct portfolios. The remaining 13-14 funds were just expensive duplicates.

The Hidden Cost of Over-Diversification

High overlap among mutual fund investments is unfortunately quite common, occurring without investors' awareness. Let me show you exactly how much this costs.

Ankita's Portfolio vs. Simplified Portfolio

The difference: ₹13.9 Cr - ₹10.4 Cr = ₹3.5 crore lost - just because of over-diversification and high expense ratios.

Per year performance drag: 1.5% (2.0% - 0.5%). Over 30 years, a seemingly small 1.5% annual drag compounds into a ~33% wealth loss.

Why Over-Diversification Makes You Poorer

High overlap undermines the fundamental principle of diversification, which aims to mitigate risk by spreading investments across different assets

Reason #1: You're Paying Multiple Fees for the Same Stocks

If two or more of your funds own very similar stocks, you could be paying multiple management fees for exposure to essentially the same assets

Example:

All 4 of Ankita's large-cap funds owned Reliance Industries:

• Fund 1: 8% allocation to Reliance
• Fund 2: 7.5% allocation
• Fund 3: 9% allocation
• Fund 4: 6.5% allocation

Result: She paid 4 different expense ratios (totaling 7-8%) to own the same Reliance stock. If she'd used ONE large-cap index fund, she'd pay 0.1% expense ratio for the same Reliance exposure.

Reason #2: Overlap Kills Alpha

When you own 20 funds, you're essentially recreating the market index but paying 10-20x more in fees.

The math:

• Nifty 50 Index Fund: 0.1% expense ratio
• Your 20-fund portfolio: Average 2% expense ratio

High overlap can lead to 'di-worsi-fication' where you think you are diversified but are actually holding the same underlying assets

Reason #3: You Can't Track Performance

Ankita admitted: I don't even know which of my 18 funds are performing well or badly. I just keep investing.

When you have 20 funds:

• You can't track individual fund performance
• You don't know which ones to keep or sell
• You miss underperformers dragging your portfolio down
• Rebalancing becomes impossible

Result: Portfolio management paralysis.

The 3-Fund Portfolio That Beats 20 Funds

After showing Ankita the math, I helped her restructure her portfolio.

Old Portfolio: 18 Funds

• Average expense ratio: 2.0%
• Portfolio overlap: 65%
• Projected 30-year corpus: ₹10.4 crore

New Portfolio: 3 Funds

Weighted average expense ratio: (0.6 × 0.1%) + (0.3 × 1.2%) + (0.1 × 1.5%) = 0.57%
Projected 30-year corpus: ₹13.9 crore
​Improvement: ₹3.5 crore more (~33% higher!)

Why This 3-Fund Portfolio Works

1. Minimal Overlap

• Nifty 50 Index: Tracks top 50 large-caps
• Flexi-cap Fund: 30% large, 40% mid, 30% small (different from Nifty 50)
• Mid-cap Fund: Focused on mid-caps (101-250 rank)

Total overlap: Less than 15%

It is important to consider the extent of portfolio overlap while constructing a mutual fund portfolio as it gives each scheme its own unique identity

2. Low Costs

Old portfolio: 2.0% average
​New portfolio: ~0.5% average
​Annual savings: 1.5%

On ₹50K/month SIP over 30 years:

• 1.53% saved annually = ₹3.5 crore more in final corpus

3. Easy to Track

With only 3 funds:

• Check performance in 5 minutes monthly
• Easy to rebalance (shift from one to another)
• Spot underperformers immediately
• Clear understanding of where your money is

4. True Diversification

By market cap:

• 60% Large-cap (Nifty 50)
• 40% Mid/Small-cap (Flexi + Mid-cap)

By management style:

• 60% Passive (index)
• 40% Active (manager skill)

By sector: Automatically diversified through broad indices and active management

Common Myths About Diversification

Myth #1: "More funds = more safety"
Reality: More funds = more overlap = concentrated risk + higher costs

A high degree of overlap can limit the effectiveness of diversification, exposing the portfolio to heightened risks associated with specific sectors, industries, or individual securities

Myth #2: "Different AMCs = diversification"
Reality: AMCs don't matter. Portfolio composition does.

ICICI, HDFC, and SBI large-cap funds all own the same top 20 stocks (Reliance, HDFC Bank, TCS, etc.) because they're forced to by SEBI regulations.
Different AMC ≠ Different portfolio

Myth #3: "I need at least 10 funds for proper diversification"
Reality: 3-5 well-chosen funds give you complete diversification.

A Nifty 50 Index Fund alone gives you exposure to 50 stocks across 13 sectors. That's already diversified.
Adding 19 more funds doesn't diversify further - it just adds cost.

Myth #4: "NFOs help me diversify"
Reality: NFOs are usually me-too products with high overlap with existing funds.

There's a common misconception that investing in a wide array of schemes, such as New Fund Offers (NFOs), automatically results in diversification. However, this approach can be counterproductive.
Skip NFOs unless they offer truly unique strategies (which is rare).

The Bottom Line: Less is More

More funds ≠ Better diversification

In fact:

• More funds = More overlap
• More overlap = Higher costs
• Higher costs = Lower returns
• Lower returns = Poorer you

The sweet spot for most investors: 3-5 funds. Beyond that, you're just giving away wealth to AMCs through unnecessary expense ratios.

👉 Action Step for This Week

Step 1: Count how many mutual funds you currently own
​Step 2: If you have more than 7 funds, check portfolio overlap. I wrote an earlier newsletter to determine portfolio overlap here.
​Step 3: Identify funds with 50%+ overlap.
​Step 4: Exit the fund with:

• Higher expense ratio, OR
• Lower Sharpe ratio, OR
• Worse downside protection (Sortino ratio)

Step 5: Consolidate to 3-5 core funds maximum. Every fund you eliminate saves you 1.5-2% in expense ratio annually. Over 30 years, that's lakhs to crores saved.

That's how wealth destruction spreads - one over-diversified portfolio at a time.

If this opened your eyes to hidden portfolio overlap, forward it to one friend who's proud of their "diversified" 15-fund portfolio. They're losing lakhs without realizing it.

Got questions about portfolio overlap or need help consolidating your funds? Hit reply with your fund list and I'll analyze the overlap for you.

Connect with me on LinkedIn, I write every day to help you make smarter money decisions 👇

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