How to use the mutual fund portfolio comparison tool

Published: August 16, 2015 at 11:12 am

In this post, I discuss how to use a mutual fund portfolio comparison tool.

First, I would like to thank Basavaraj Ghuli for spotting an important error in the sheet. Turns out, Moneycontrol lists some stocks twice in the portfolio! This is not in error as the percentages add up to 100. However this will affect the way the sheet calculates, “no of stocks” and “percentage overlap’. I have now fixed this error. The revised sheet can be downloaded at the end of this post. The other posts on this topic,

Moneycontrol edition: Equity Mutual Fund Portfolio Comparison Tool

Bugfix: Equity Mutual Fund Portfolio Comparison Tool

have been updated with the latest version of the sheet.

Now over to how to use a mutual fund portfolio comparison tool.

(1) You don’t need to use one!

Yes, you don’t need to use a portfolio comparison tool if you choose funds with narrow mandates. That is, if you choose one large cap fund and one mid and small-cap fund, the overlap in their portfolios will be typically small. So there is no need to worry about it.

However, if the large cap fund gets popular, it may resort to buying mid-caps to stay popular (Example: ICICI Focussed Blue Chip). If the mid and small cap fund gets popular, it has to buy large caps, unlesss it restricts inflows.

Therefore, while it is important to buy a fund which has performed over market cyles, I think it is not a bad idead at all to consider ‘good’ funds no one is talking about. Easy enough to find them. Use the Mutual Fund Screener and check the AUM at Value Research.

This way, the portfolio overlap will remain small for extended periods of time.

(2) Overlap values are not constant! 

Yes, the overlap will change even on a monthly basis if they are ‘popular funds’ or if they belong to the same category.  So there is little reason to rejoice if he overlap is low or despair if the overlap is high.

(3) Weights of the common stocks matter!

Suppose two funds, A and B, have 40% of common stocks. Does it mean, one fund should be removed? No.

Fund A could have say, 8% of one stock and Fund B could have only about 1% of the same stock.

High overlap implies large number of common stocks with high weights.

(4) It is all subjective!

What does high overlap mean?! Let us agree that anything above 50% of common stocks (regardless of weights) implies that the funds have a similar investment profile.

What about 40% overlap? What about 20%? These are the typically found numbers and it is hard to tell which is high and which is not.

(5) Overlaps tools hold a mirror up to your investment strategy

More than an analytical tool, it help you understand how you have been buying funds. If the overlap is ‘high’, we should  study the investment objective of the funds that you hold. It will help us make better investment decisions in future.

(6) Do not change funds based on this tool alone!

If the overlap is ‘high'(!), do not make immediate changes to your fund portfolio. Use a portfolio tracker like Value Research or Perfios and study the large cap: mid cap: small cap composition of your portfolio. If it is something you are comfortable with, you don’t need to do anything immediately.

If it is off significantly (eg. too little large caps) then you need to adjust the folio by substituting one fund which has a large overlap.

(7) Choose Minimalist Portfolio Ideas for Young Earners   or Turnkey mutual fund solutions to beat inflation This way, you do not have to worry about fund overlap!

Suggestion for new investors/ young earners: If you want start investing in mutual funds, buy one fund (say a a large cap fund) and invest in it for a while (even a year). Learn more about mutual funds and choose your second fund carefully. See if this helps: Young Earners Guide to Mutual Fund Investing

Download the updated  Equity Mutual Fund Portfolio Comparison Tool

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