Do Your Investments Suffer From Mutual Fund Overlap?

by Hank Coleman

Do Your Investments Suffer From Mutual Fund Overlap?How many mutual funds do you invest in? Do you have several spread out between Roth IRAs, or do you invest in several mutual funds through your company’s 401k retirement plan? Do you know which stocks those funds invest in? You may suffer from mutual fund overlap.

You may be surprised to learn that many of these mutual funds overlap. There can be a real danger in mutual fund overlap, and you may not as diversified as you think.

What Is Mutual Fund Overlap?

When a mutual fund does well, investors pile into the investment. Eventually, you wind up with incredibly large mutual funds. For example, the Fidelity Contra Fund (Ticker Symbol – FCNTX) has over $56 billion in total assets invested in the mutual fund. Some of the mutual fund’s top holdings include stocks such as Wells Fargo, Walt Disney, Amazon, Coca-Cola, McDonald’s, Google, Apple, and others.

If you look at many of the other top 25 largest mutual funds, you will find a lot of other mutual funds holding many of the same company’s common stock. If you dig deeper into the holdings of Growth Fund of America (AGTHX) with its $ 54.8 billion in assets, you will find many of the same names found in the Fidelity Contra Fund such as Google, Amazon, Apple, and others.

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If you owned both of these mutual funds in your investing portfolio, you could be a victim of mutual fund overlap where many mutual funds in your portfolio invest in the very same stocks as one another.

The Danger Of Mutual Funds Overlapping

Of course the real danger of mutual fund overlap is that you may not be as diversified as you think you may be. If you invest in an index fund that mirrors the overall stock market and another actively traded mutual fund, you will most likely always have a little bit of overlapping.

One of the biggest dangers happens when you only have actively traded mutual funds in your investment portfolio. This can be a recipe for disaster if you are not careful. You need to understand what your mutual funds are investing in so that you can be fully diversified. You do not want all of the mutual funds you invest in to react to changes in the market or economy the same way. You want some of your investments to zig when others zag.

How To Avoid Mutual Fund Overlap

There are many tools on the internet that you can use to find quality mutual funds. Yahoo Finance has a great mutual fund screener. There are also a few thing that you can do when choosing a mutual fund to help you prevent mutual fund overlap.

For example, it may be wise not invest in too many mutual funds from the same parent company that manages those funds. Consider the type of investing objective of each mutual fund that you own and consider spreading out amongst large cap, mid cap, and small cap mutual funds.

You will do well also to spread your investments out amongst growth and value stocks. Morningstar.com also offers a Portfolio X-Ray tool on their website that can conduct a mutual fund overlap analysis for you. Optimize your portfolio with the Portfolio X-Ray only from Morningstar.

Having your mutual funds overlap with one another is not the end of the world. Many investors experience some type of mutual fund overlap. The real issue is the extreme case where you own several mutual funds in the same fund category, investing in the exact same stocks. You run the risk of not being properly diversified in your investing portfolio.

This can also be hazardous if this mutual fund overlap occurs in your retirement accounts. Staying up-to-date with your investments and what the fund managers are investing in on your behalf is the best preventative medicine.

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About Hank Coleman

Hank Coleman is the founder of Money Q&A, an Iraq combat veteran, a Dr. Pepper addict, and a self-proclaimed investing junkie. He has written extensively for many nationally known financial websites and publications. Hank holds a Master’s Degree in Finance and a graduate certificate in personal financial planning. Email him directly at Hank[at]MoneyQandA.com.


Hank Coleman has written 581 articles on Money Q&A. Learn more about Money Q&A on Twitter @MoneyQandA and @HankColeman.


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{ 2 comments… read them below or add one }

Eric J. Nisall - DollarVersity

I think sometimes people can get too caught up in the asset allocation issue and end up wasting a lot of time (and sometimes money too) trying to micromanage their portfolios. Like you said Hank, most investors experience it since there are so many different options and objectives when it comes to mutual funds, that many may carry holdings in the same or similar companies. I think it’s the broad spectrum of allocating the portfolio that’s most important as opposed to making sure that you only have exposure to a company one.

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Buck Inspire

Great point! I think many investors don’t realize this is happening. In your example, if you had a few funds like Fidelity Contra, how would you diversify? Would you go more conservative since Contra has a lot of volatile stocks?

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