A client holds four equity funds of Rs 5 lakh each; pairwise overlap by weight runs from 41% to 62%, and together they hold 212 stocks but the top 40 make up 71% of his money. How many funds is he really holding, and what would you consolidate?

He is effectively holding about 1.6 funds, not four: average overlap is about 51%, and 40 stocks carry 71% of his money. Keeping only the large cap fund and the value fund, the least overlapping pair at 41%, gives about 1.4 effective funds, nearly the same diversification with half the line items. Consolidate by redirecting new SIPs first and selling the other two gradually, watching exit loads and capital gains tax.

Four friends recommending restaurants from the same street have given you one street, not four neighbourhoods. Diversification comes from owning different things, not from owning different fund names, and these four funds largely own the same large companies. Pairwise overlap averages about 51%, and the 212 stocks hide the concentration: the top 40 carry 71% of his money, so the other 172 share the remaining 29%, many of them at weights too small to matter.

Borrow the effective number of bets from portfolio theory: with n holdings and an average correlation rho between them, they behave like n / (1 + (n - 1) x rho) independent ones. Using overlap as a stand-in for correlation, four funds at about 51% overlap behave like 4 / (1 + 3 x 0.51), about 1.6 funds. The limit of the shortcut is that overlap by weight is not return correlation; diversified equity funds in one market are usually even more correlated than their overlap suggests, so the true figure is likely lower still.

Keep the pair that overlaps least. Large cap fund A and value fund D overlap 41%, so together they give 2 / 1.41, about 1.4 effective funds. Two funds deliver almost all of the diversification four were giving, with fewer fees to watch and a portfolio he can actually understand. If he wants a third, add something genuinely different, a mid or small cap fund or an international fund, rather than another diversified fund drawing from the same top 100 stocks.

Do it without creating new costs. Redirect his SIPs into A and D first. Then sell B and C in stages: check each fund's exit load window, and spread redemptions so that long-term gains use the yearly tax exemption where one applies; confirm the current capital gains rules before advising on timing. The goal is a cleaner portfolio, not a tax bill to get one.