Mutual Fund Overlap

A mutual fund overlap is a natural occurrence for people with a diverse portfolio of investments. These people may have invested in more than one mutual fund. The mutual fund overlap occurs when funds are held in the same securities.

As a result of mutual fund overlap, benefits from a holding may decrease. This is because more stock may be held in that one holding than what is optimal. At the same time, with mutual fund overlap, you are exposed to more investment risks when it comes to the securities with the mutual fund overlap. If the price of that security plummets, so will part of your holdings in two or more mutual funds. That’s a multiplied loss to you.

Here are tips to avoid mutual fund overlap:

1. Mutual fund overlap occurs when more than one mutual fund is invested in. Investing in more than one mutual fund is not bad. But then, if you do this, you need to know where you are investing into. Read through the funds’ prospectuses thoroughly. Know where they are likely to invest. If possible, choose mutual funds that have different focuses. The idea with have many mutual funds is that this diversifies your investments. This becomes a moot point if you will just end up investing in mutual funds that invest in the same things.

2. Manage your mutual fund holdings. Of course, this does not mean constantly looking over your fund managers’ shoulders. It just means that you need to get involved every now and then in the goings-on of your funds. You cannot just sit things out and wait to reap the benefits.