As a young earner and an aspiring mutual fund enthusiast, you probably might have received the advice to put 30 per cent of your income into investments. If you earn lakhs and plan to SIP 30 per cent, that is a significant amount. The mistake many such young investors make is they start multiple SIPs, say in 5 different mutual funds of the same type under the pretext of diversification. Here's why you should stop some of those SIPs and consolidate your portfolio. Some even invest minor amounts like Rs 500 or Rs. 1000 in SIP in four mutual funds of the same category, for instance in 4 large-cap funds and then in another four mid-cap funds. If you have different financial goals, such as saving for your child's education or a new home, you may feel you need to have separate SIPs in different mutual funds. Instead, you can invest in different SIPs in the same mutual fund under different folio numbers for each of your goals. However, it's not essential since you can withdraw funds as needed from a mutual fund.
Avinash Luthria, SEBI RIA at Fiduciaries highlights the thumb rule to follow when deciding the number of funds you should invest in. "After the total investment in the first MF house crosses 15 per cent of your portfolio (including FDs etc), then stop investing in that MF house and start investing in a second MF house. This is to mitigate the risk of poor performance by one Chief Investment Officer and anyone MF house facing some temporary technology issue," Luthria said.
Diversification In Wrong Sense: Diversification of exposure in a portfolio does not depend on the number of funds you have. The stocks that the funds invest in are what matters. There are only 100 large-cap stocks to choose from, so if you invest in four large-cap funds, there will be significant overlap in your portfolio. So don’t focus on more number of funds but more funds from different categories. One fund in each category is good enough for diversification.
Paying Little Attention To Stock List: So invest in multiple categories for diversification and not in different funds of the same category. Generally, experts advise investing in the ratio of 40 per cent, 30 per cent, and 30 per cent of your equity allocation in the large-cap, mid-cap, and small-cap categories. Also if you choose different categories of funds, overlap may occur because many mid-cap funds also invest in select large-cap stocks for fund stability. So always check the stock list of mutual funds to avoid overlap to the extent possible.
More Paperwork and Clutter: So if you are selecting more than one fund from the same category of funds, you are just doing more paperwork and not diversifying the investment. To pay tax, you need to get info on investments from multiple fund houses, so efforts will multiply with more SIPs. Further, if it is tax tax-saving mutual fund, to avail of the exemptions and pay the appropriate tax, you need to keep a record of the investment proof to submit it to the employer for claiming tax benefits. Here also duplication and accompanying portfolio clutter n can be avoided if you consolidate multiple funds in the same category. Then you have one less fund to monitor daily on your mobile app.
Volatility: Further if you invest in different funds investing in the same stock universe, all the funds in a category will react in the same way to a market phenomenon. They all will drop in value almost to the same extent if there is a bear phase. So investing in multiple funds within the same stock universe doesn't make sense.
