Avoid Mutual Fund Overlap: Focus on Role, Not Count

Instead of relying on fund categories, Agarwal said investors should ask what additional role a new fund will play before committing money. “A new fund should ideally bring something genuinely different–such as international exposure, a debt allocation for near-term goals, a gold component for diversification, or a clearly differentiated style exposure–not just another version of the same India large-cap equity basket,” he said.

Every new investment should fill a gap rather than duplicate existing exposure, according to Agarwal. Owning several funds also makes monitoring harder. A ₹25,000 monthly SIP split equally across five funds remains manageable if each scheme serves a specific objective. Spreading the same amount across eight or ten funds can dilute oversight without improving returns.

Agarwal concluded that investors should measure diversification by the difference in exposure, not by the number of funds they own. Before adding another fund, they should assess whether it reduces portfolio concentration, improves diversification across asset classes, market caps or investment styles, and aligns with a specific financial goal. A compact portfolio of five to six well-selected funds often provides better diversification than owning ten to twelve overlapping schemes, provided each holding has a clear and distinct purpose.