New Delhi, Sept. 29 -- Investors often assume that holding several mutual funds automatically creates diversification. But if two or more schemes own many of the same stocks, the portfolio may be less diversified than it appears. This is where portfolio overlap becomes important.

"Some overlap between mutual funds is neither unusual nor necessarily a problem. In fact, it is quite natural when funds operate in similar market segments or draw from the same investment universe," said Debasish Mohanty, MD & Chief Strategy Officer, The Wealth Company Mutual Fund.

According to Mohanty, overlap becomes a concern when multiple schemes provide substantially similar exposure without adding meaningful diversification. An investor could hold severa...