Hello Readers!
Mutual Funds have a wide range of diversified equity funds, nearly 300, to choose from for your Systematic Investment Plan. Picking out the best suitable funds as per your requirement and investing is a tough process but analysis makes it easy. The dilemma is not only which funds to pick for your portfolio but also to know when to stop adding.
As per experts, if you have over 10 schemes, in your equity fund portfolio, then you are beyond your maximum limit. But in case, if all the funds you have picked perform well, can be a good enough reason to own all of them?
A simple answer to this is no. Here is what you need to understand about over-diversification and how to avoid it
DO NOT GO DUPLICATING WHAT YOU ALREADY HAVE
A diversified equity mutual fund exactly means that it will have anywhere between 40-60 stocks across different sectors. Large-cap, large and mid-cap and multi-cap funds usually align portfolios with sectors that have a higher allocation in benchmark indices like Nifty and Sensex.
If you will have a glance at diversified equity mutual fund portfolio, then you can analyze that most of the portfolio represents stocks in different sectors and it is so because of the financials, which is taken as the largest weight in benchmark indices.
Added to that, SEBI has now indicated the investment strategy for different categories, that may have many similarities, especially in large-cap and large and mid-cap funds. The weights in stocks can differ but the names will overlap.
Overall, it is not worthy if you go adding the same exposure to your portfolio as the profit will not be in the form of incremental returns. What is more beneficial is, picking out stock of 4-8 different funds which have distinct strategies and low overlap, and make sense considering your long-term goals. Diversifying your equity portfolio in this way will help you, give enough exposure to unique stocks which can contribute to long term growth.
IT MAY PULL DOWN YOUR POTENTIAL LONG-TERM RETURN
It is not mandatory that a single fund which is today’s top-performer will remain the same forever, or for each year. When you choose funds for your long-term goals, it will be better if you pick out them based on their consistency in the market.
If you have too many funds in your long-term Equity fund portfolio, then at a point of time you may observe that some funds are doing well while some are low, which might bring down your portfolio average return. Thus, it will be much better for your investment and portfolio, if you stick to a handful of consistent performers, in the long run, you will benefit from their capability.
Diversification helps to spread risk so that if one fund is underperforming another may contribute positively. However, having too many funds can damage your returns. The risk of having too many underperformers at a point in time and duplication of style means that your diversification strategy is not beneficial to your portfolio, and hence not for your returns.
For any kind of query, you can contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.
Happy Investing!
(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).