Despite the growing availability of exchange-traded funds, investors may not achieve true diversification through quantity alone. According to reports from ValueCurve Financial Services, an investor holding Nifty 50 ETF, Nifty 100 ETF, and Nifty 500 ETF may appear to have exposure to 50, 100 and 500 stocks respectively, but significant overlap exists across these indices, particularly in large-cap firms that receive higher weighting in market-cap-based indices. As reported by Alankit Limited, investors often collect multiple overlapping products such as broad market index funds, large-cap tech funds, and smart-beta momentum funds, all holding the same top companies. Recent analysis from Mint confirms this concern, with Rhishabh Garg, CEO of FundsIndia.com, noting that a mutual fund may already hold 40-60 stocks or more, and two schemes with different names can still have significant overlap in their holdings and investment styles.
Financial experts emphasize that diversification should focus on exposure rather than product quantity. According to ValueCurve Financial Services, Ronak Morjaria noted that adding broad-based index funds along with normal mutual fund portfolios creates duplication and portfolio overlap. However, ETFs remain useful for strategies less available through active funds, such as factor-based strategies like momentum where active funds are limited to 2-3 options. CFP Shweta Shastri from Alankit Limited recommends considering diversification at three levels: asset allocation, market exposure, and the product itself, with the key distinction being whether an addition genuinely changes the portfolio's risk or return profile. Mint's Rhishabh Garg suggests genuine diversification comes from combining assets and strategies that do not move in lockstep, pointing to investment styles such as growth at reasonable price, value, quality, mid and small caps, and global exposure.
The risk of duplication becomes increasingly relevant as investors accumulate funds across different categories. According to Mint's analysis of 13,600 mutual fund portfolios, 16% underperformed the Nifty 50 while 86% underperformed the firm's model portfolio, demonstrating that simply holding a larger number of funds does not necessarily translate into better outcomes. A hypothetical portfolio comprising large-cap, flexi-cap, focused, dividend-yield, contra, value and Nifty 50 index funds may appear diversified across seven categories, but underlying exposures reveal significant concentration risks. Large-cap funds have around 82% exposure to large caps, flexi-cap funds nearly 60%, focused funds around 65%, value funds about 60%, contra funds 55% and dividend-yield funds 67%, while a Nifty 50 index fund has virtually its entire portfolio in large-cap stocks.
Sector concentration can create additional layers of risk even when investors choose funds from different categories. Mint's analysis reveals that a portfolio comprising SBI Large and Mid Cap, HDFC Flexi Cap and ICICI Prudential Focused Fund shows banking as the top sector across all three funds. An investor putting ₹1 lakh in each could end up with roughly 27-30% of the total portfolio concentrated in banking, meaning even when individual stocks differ, the funds could still respond similarly to a banking sector downturn. This demonstrates how important it is to examine underlying sector and market-cap exposure beyond fund names and categories, as investors need to look beyond the number of schemes and examine what each fund actually adds to the portfolio.
The risk of duplication becomes increasingly relevant as passive investing continues to expand. According to Stockify, passive fund assets crossed ₹15.27 lakh crore as of May 2026, representing a 24.7% year-on-year increase, while ETF investments reportedly increased by around 40% in FY26. As reported by Alankit Limited, investors must examine underlying indices, major holdings, sector allocation, and portfolio overlap before adding another ETF. The growing popularity of ETFs, which were introduced in India in 1993, has made it easier for investors to build portfolios with overlapping exposures. Mint's analysis confirms this trend, with Amitabh Lara, executive director at Anand Rathi Wealth Limited, noting that the problem becomes more apparent when investors choose funds from different categories but do not examine their underlying portfolios.
