Portfolio overlap shows us common stocks in 2 mutual fund schemes and calculates the percentage of overlap based on these stocks. There are several platforms wherein we can enter 2 mutual fund schemes and get details of overlap.
But is this something we should be concerned about? To answer this question, let’s understand few points related to mutual fund investments as below:
- Do we have any information on the price at which mutual fund bought a particular stock? Answer is No
- Do we know how long the fund is going to hold a particular stock and when they decide to exit? The answer is again No
- Do we know what is the profit or loss of mutual fund from a stock? Answer is a big No
As the answer to above questions are ‘No’, analyzing portfolio overlap needs to be avoided.
There could be one mutual fund which bought a particular stock at 200 rupees and sold it at 400 rupees, and another mutual fund which bought the same stock at 350 rupees and sold it at 400 rupees. Profit for both funds are not the same.
Now, there could be a question that I have been always following the interviews of my mutual fund manager, I know which sectors he/she is bullish on, and I am sure stocks related to those sectors will be held for long term by the fund manager. Should I consider portfolio overlap as a parameter for investment in this case?
To answer this question, we are not sure about the global event impact on a particular sector, or policy changes by the government which could drive or drag a particular sector, or if there is some big news related to the company. The fund manager will make decision on stocks based on these factors.
Adding to this, what if the fund manager changes and the newly appointed fund manager switches stocks in mutual fund based on his/her analysis which is different from the previous fund manager.
So, to conclude there are several parameters to analyse mutual fund performance and portfolio overlap needs to be avoided.