2 weeks ago
More Mutual Funds Don't Guarantee Better Portfolio Diversification, Experts Warn
Many people think buying more mutual funds makes their money safer.
A mutual fund is like a big basket that holds many company shares.
But experts say having many baskets does not always help.
Two different-looking funds can secretly hold the same companies.
That means your money may be invested in the same places twice.
Experts checked many portfolios and found many were not well spread out.
Even funds from different categories can be heavy in the same big companies.
Some funds are very concentrated in one business, like banking.
If that business does badly, many of your funds could lose money at the same time.
So before adding a new fund, check what is really inside it.
Experts say the number of mutual funds an investor holds tells little about actual diversification, since funds can overlap in holdings and styles.
Rhishabh Garg of FundsIndia.com says genuine diversification comes from combining assets and strategies that do not move in lockstep.
An Anand Rathi Wealth audit of about 13,600 portfolios found 16% underperformed the Nifty 50 and 86% underperformed the firm's model portfolio.
A hypothetical portfolio spanning seven categories (large-cap, flexi-cap, focused, dividend-yield, contra, value, Nifty 50 index) can still be heavily tilted toward large-cap stocks.
Investing ₹1 lakh each in SBI Large and Mid Cap, HDFC Flexi Cap and ICICI Prudential Focused Fund could leave roughly 27-30% of the portfolio concentrated in banking.
- Who
- Indian mutual fund investors, with analysis from Rhishabh Garg, CEO of FundsIndia.com, and Amitabh Lara, executive director at Anand Rathi Wealth Limited.
- What
- Owning more mutual fund schemes does not necessarily mean owning a more diversified portfolio because funds can overlap in stocks, sectors and market-cap exposure.
- Where
- India.
- When
- Not stated in the article.
- Why
- Different funds can hold the same underlying stocks, sectors or market-cap segments, so adding schemes may duplicate existing exposure instead of spreading risk.
More funds means more diversification
Fund count doesn't equal diversification
Number of funds vs. actual diversification
More funds means more diversification
Adding another mutual fund scheme to a portfolio feels like a simple way to spread risk, so holding more funds should make a portfolio more diversified.
Fund count doesn't equal diversification
The number of funds tells investors very little about diversification, as different schemes can hold the same stocks, sectors and market-cap segments, duplicating exposure.
Key facts
- Portfolios audited
- ~13,600 mutual fund portfolios
- Underperformed Nifty 50
- 16% of audited portfolios
- Underperformed model portfolio
- 86% of audited portfolios
- Large-cap exposure by fund type
- Large-cap ~82%, flexi-cap ~60%, focused ~65%, value ~60%, contra ~55%, dividend-yield ~67%, Nifty 50 index ~100%
- Example sector concentration
- 27-30% of a ₹3 lakh portfolio in banking
- Funds cited for overlap
- SBI Large and Mid Cap, HDFC Flexi Cap, ICICI Prudential Focused Fund
Quotes
Rhishabh Garg
CEO of FundsIndia.com
“The moment an investor cannot say what a particular fund adds that another one does not, that is the line.”
livemint.com
“The number of funds an investor holds tells us very little about how diversified they actually are.”
livemint.com
Sources
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