Working in the financial services space for 14 years, Sneha (name changed) a resident of Mumbai warmed up to Mutual Funds a lot earlier than her friends. That early advantage was used by Sneha to good effect. She started consciously investing in four goals: wealth creation, tax-saving, income solutions, and liquid solutions. However, Sneha fell prey to a major problem. Every 6-7 months, she started buying new schemes. Ideally, her 4 goals would not need many schemes. Can you guess how many schemes she had in her portfolio? 10? 15? No. Over 10 years she had accumulated as many as 22 schemes!
Investing experts often use an old but popular adage - 'Don't Put All Your Eggs in One Basket.' This sentence seeks to drive home the simple point that when your money is distributed into a range of options, the investment risk too is spread out. Many investors swear by this wisdom. Two is better than three. Four is better than five. So, they start adding new schemes to their portfolio by the month. Pretty soon, the mutual fund schemes portfolio looks a list of the who's who of the industry. Investors seek solace from the 'strength' in numbers. But it’s a mirage. Knowing exactly how many schemes you should hold in your portfolio is important. Here we explain what should be your approach and what you should consider.
Too Much Of a Good Thing
When investors like Sneha begin their Mutual Fund investing journey, they do a lot of things in the right earnest. They learn the important things, start investing regularly and become disciplined. However, they falter at diversification. How much is enough? How much is too much? These questions never bother them. Investors often start buying schemes based on historical performance.
When you have too many schemes, even the best ones, you as an investor are likely to face a dilemma as to which scheme to drop. Just a different scheme with a different name is not diversification. The onus is on you to find out how two schemes are really different.
Can't Beat Market by Copying Market
In the quest for diversification, investors end up buying many mutual fund schemes. But, is a higher number of schemes the secret to diversification? No, it is not. Diversification essentially aims to achieve lower risk. For an average retail investor, having 3 or 4 schemes for each goal is a recipe for financial complication.
We believe that an investor should have a maximum of 4 – 5 schemes for all his investment needs. There is no extra benefit in a larger number of schemes.
Fund managers aim to generate consistent returns through careful selection of investments. So by buying too many schemes, you could end up owning the same investments that one fund manager actually avoided. This will make it difficult to generate returns higher than the market.
To sum up, Mutual fund schemes could be one of the options for investing. To achieve reasonable returns, you may limit your investments to maximum 4-5 schemes for all your goals together. Instead of buying schemes based only on their performance, dig a little deeper to find out the difference in investment style and preferences to seek true diversification. When assessing whether you hold the ‘right’ number of schemes, watch out for duplication. If you have too many schemes, re-assess your portfolio and make adjustments to have a real fighting chance at meeting your goals.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully