22 Oct Are my mutual funds too similar?

Q. I understand asset allocation, but it seems so many mutual funds own the same stocks. How can I make sure my funds don’t overlap too much?
— Making choices

A. If you’re a do-it-yourselfer, you should be commended for wanting to learn more and dig below the surface.

Just because you invest in a few different funds it does not mean that you are properly diversified, said Ronald Garutti, a certified financial planner with Newroads Financial Group in Clinton.

Garutti said this could be especially true in large-cap mutual funds.

“For instance, if you invested in four different funds and all four funds have similar top ten holdings, then there is a pretty good chance your overall allocation is not highly diversified — especially if the top positions take up a significant portion of the portfolio,” he said.

A lot of funds may appear to be different based on their names, but until you explore the details, you won’t know for certain, he said.

Garutti recommends you consider working with a professional.

“There may be online tools to use, but a qualified professional would not only give you a detailed analysis of how your funds overlap, but he/she would be able to provide you suggestions and alternatives to avoid overlap,” he said.

Diversification does not just mean having multiple choices.

“You need to consider the strategy, design, goals, manager style, etc.,” Garutti said. “You should also review turnover history. If an investment has frequent turnover, then holdings data they report publicly might not be up-to-date.”

Identifying strategy differences is another key tool to research, Garutti said.

“Does the fund manager have a distinct style that they utilize or do they limit themselves to a specific area of expertise?” he said. “If all of the funds you own are identifying investment choices from a similar pool, there is a good chance your overlap will be high.”

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This story was first posted in October 2015.