Most investors know the merits of diversification – owning different stocks and bonds so that when some go down others go up. By spreading your money among a number of mutual funds, you can spread your eggs among many baskets.

But what if Fund A and Fund B have many of the same holdings? Then your portfolio may not be as diversified as you think. Inadvertently concentrating your money can stunt gains and amplify risks.

"This is a far-too-common problem," says Dan Kern, chief investment strategist at TFC Financial Management in Boston. "Investors often end up with unintended concentrations in their portfolio due to overlap in various funds. The worst-case scenario is an excessive concentration in a risky part of the market, something that happened to many investors before the technology bubble burst in 2000."

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"Some people have portfolios with 10 or more funds that all focus on U.S. stocks," says Benjamin Sullivan, portfolio manager at Palisades Hudson Financial Group in Austin, Texas. "Just because you have multiple funds doesn't mean you have a globally diversified portfolio."

So how do you know how much duplication you have?

It can be hard to know day by day, because funds typically report their holdings only every three months. If you own actively managed funds you just don't know how the fund's portfolio changes between reports, even though the managers should consistently follow the strategy they've promised – owning large capitalization stocks or foreign stocks, for instance.

"I think this is more of a problem with portfolios that rely on actively managed funds rather than index-oriented portfolios," Kern says, referring to the way many investors have recently bought the same stocks over and over through different funds aimed at maximizing dividends.

"That concentration may have worked well through much of 2016, but would have hurt in the post-election selloff of many dividend plays," he says.

Many actively managed funds use standard indices such as the Standard & Poor's 500 index to gauge performance and may actually be dominated by the securities in the index. But trading costs make it hard for a fund to do as well as the index.

Guy M. Penn, of the Rush Penn investment management firm in St. Louis, says that "many active asset managers are erring on the side of sameness rather than following their own unique investment selection process. Over time, many actively managed funds begin to resemble the indexes they purportedly track. Investors would be wise to look at the underlying cost of these funds, and not pay for those simply tracking an index, which can be replicated at a fraction of the cost."

Investors who use indexed products, whether mutual funds or exchange-traded funds, should have a clearer idea of what's in them, because those funds simply buy and hold the securities known to be in the underlying index.

But choosing indexed products tracking different indices does not guarantee you will avoid overlap, warns Adam Jordan, director of investment research at Paul R. Ried Financial Group in Bellevue, Washington.

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"I'll see investors owning the Vanguard Total Stock market ETF (ticker: VTI), which tracks an index that covers nearly the entirety of the U.S. stock market and has over 3,600 holdings, and then they will buy the Vanguard Growth ETF Index (VUG), Vanguard Value ETF (VTV) and Vanguard MidCap Index ETF (VO)," he says. "What they often don't realize is that each of those ETFs are simply segments which are already included in the Vanguard Total Stock Market ETF."

For insight into the problem, firms like Morningstar have created tools that detect portfolio overlap by comparing the holdings in different funds.

With Morningstar's Instant X-ray, the user puts in the dollar value of each fund in the portfolio and the tool reports what percentage of holdings in each asset class and industry sector, as well as the percentage of each fund, and the portfolio as a whole, devoted to each stock.

A look at a portfolio divided equally between Vanguard 500 Index Inv (VFINX) and Vanguard Total Stock Market Index (VTSMX) shows the largest to be Apple (AAPL), accounting for 3.19 percent of VFINX and 2.48 percent of VTSMX, for a total of 2.84 percent of the combined portfolio. That's fine if you like AAPL, but may be too much if you don't.

The tool shows many duplicates in the two funds, with Microsoft Corp. (MSFT), Exxon Mobil Corp. (XOM) and Johnson & Johnson (JNJ) making up the next largest overlaps. A breakdown of stocks by type shows the combined portfolio virtually duplicates distribution of the S&P 500.

Owning these two funds would provide almost no diversification beyond what the investor would get with either one individually. Some experts suggest avoiding buying a fund in which 20 percent or more of assets are duplicated in another fund you already have.

Once you've found too much overlap, it may be tricky to decide what to do.

"Overlap itself is not cause for concern so long as you understand the reason for the overlap and the true exposure your portfolio has to each company, sector, or asset class," Sullivan says. "You should review your portfolio's overlap every year and before adding new funds."

The remedy is to pull money out of the least desirable, to add to the funds you keep or to buy something different.

To minimize taxes triggered by sales, the investor may have the opportunity to confine the sales to tax-favored accounts like individual retirement accounts and 401(k)s. It's not necessary that every account match the asset allocation in the master plan so long as the portfolio as a whole does, though it does make sense for each account to have a mix suitable for its purpose, like college coming soon versus retirement much later.

"Investors should be aware of the tax consequences of reducing portfolio overlap," Kern says, noting that money-losing investments can be sold to offset taxes on winners.

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Sullivan says, "If you're going to generate large gains by selling a fund, consider whether it's worse to have the (excessive) overlap or to pay the taxes."