Should You Invest in Similar Mutual Fund Schemes? Pros and Cons

The mutual fund market in India has exploded with options, leaving many investors wondering if they should spread their money across similar schemes. You’ve probably seen this yourself multiple large-cap funds with nearly identical portfolios or small-cap funds targeting the same sectors. Let’s break down whether doubling up makes sense for your portfolio.

When Similarity Creates Strength

Investing in similar mutual fund schemes isn’t always redundant. Fund managers, despite chasing similar objectives, often take different approaches to stock selection. One large-cap fund might favor banking stocks while another in the same category leans toward IT. This subtle difference means they’ll perform differently during sector-specific market movements.

The Diversification Myth

Many investors buy similar funds thinking they’re diversifying, but this creates what investment experts call “di-worse-ification.” When you hold multiple large-cap funds, you’re essentially creating an expensive index fund. A look at the top holdings of most large-cap funds reveals significant overlap—they all own shares of HDFC Bank, Reliance, and TCS. You pay higher expense ratios for portfolios that move almost identically.

The Hidden Cost of Overlapping

Each mutual fund charges an expense ratio that eats into your returns. The average equity fund in India charges between 1.5-2.5% annually. When you invest in multiple similar schemes, you’re paying this fee repeatedly for largely overlapping portfolios. Over 10-15 years, this can reduce your wealth by lakhs of rupees through compounded costs.

The Tracking Headache

Practical portfolio management becomes harder with similar schemes. You’ll struggle to understand which fund is performing better and why. Your quarterly or annual reviews turn into complex spreadsheet exercises rather than clear assessments. Many investors simply give up proper tracking when their portfolio has too many similar funds.

When Similar Funds Make Sense

Sometimes holding similar funds works strategically. AMC-specific risks exist—management changes, merger issues, or operational problems can affect a fund house. By spreading investments across two different AMCs with similar investment styles, you mitigate this risk. Think of it as buying insurance against fund house problems.

The Fund Manager Factor

Fund managers matter enormously. Two similar schemes can deliver vastly different returns based on who’s making the decisions. Some managers excel during market downturns while others shine during bull runs. Investing in similar funds with managers known for different strengths gives you coverage across market cycles.

The Size Consideration

Fund size impacts performance, especially in mid-cap and small-cap categories. A ₹15,000 crore fund faces more challenges in nimble stock selection than a ₹1,500 crore fund. Smaller funds can often take meaningful positions in promising companies while larger ones struggle with liquidity constraints. Holding similar schemes of different sizes can balance this dynamic.

The Rebalancing Advantage

Similar funds with slightly different investment mandates help with tax-efficient rebalancing. When you need to rebalance your portfolio, you can direct new investments to the underperforming similar fund rather than selling existing investments and triggering capital gains taxes. This subtle approach saves significant tax outgo over time.

The Case for Consolidation

For most investors, especially those just starting their investment journey, consolidation beats fragmentation. One well-chosen fund in each category large, mid, small, and maybe a flexi-cap creates a manageable, diversified portfolio. You’ll find tracking performance easier, portfolio reviews simpler, and expense ratios lower through consolidation.

The Mental Clarity Benefit

Fewer funds mean clearer thinking. When the market drops sharply or rises suddenly, having a streamlined portfolio helps you make rational decisions rather than panicking about which of your seven similar funds to buy or sell. Behavioral finance research shows simpler portfolios lead to better long-term investor behavior.

Conclusion

Whether similar mutual fund schemes make sense depends on your portfolio size, investment knowledge, and specific goals. Most investors with under ₹50 lakh in equity investments benefit from consolidation rather than duplication. Next time your fund advisor suggests adding another large-cap fund to your three existing ones, ask them to show you the portfolio overlap percentage. If it’s above 70%, you’re probably better off looking elsewhere. Try reviewing your existing fund portfolio this weekend you might find opportunities to simplify and strengthen your investments through thoughtful consolidation.