The hidden cost of adding 'just one more fund'

Open most investors' portfolios and you'll usually see a hotch-potch of schemes collected over the years rather than a carefully thought-out investment strategy: a flexi-cap from 2015, a tax-saver from 2017, two large caps bought after each bull-market TV debate, a mid cap discovered via a WhatsApp forward, a glossy NFO subscribed on the nudge of an advisor and so on. That said, no one sets out to own a dozen funds; these funds just pile up. It doesn't take long before the number of funds outscore the episodes of a long-running web series. The numbers prove it as well. Assets in open-ended equity funds have shot up from Rs 3 lakh crore to Rs 38.5 lakh crore in a decade, while the count of live schemes has climbed from 382 to 986. The first graphic - Surge in size and count - shows both lines rising almost in lock-step. Funds are getting launched at a furious rate, too. New-fund activity was before 2020. But after Covid, the watergates opened. From a modest 22 equity NFOs (new fund offerings) in 2015, 50 funds were rolled out in 2020, 87 in 2021, 111 in 2022 and a record 184 in 2024. The pace hasn't been let up this year either, with another 52 new funds hitting the market in just the first three months of 2025. While the numbers clearly show our growing appetite for mutual funds , there's a worrying trend beneath the surface. The supply of fresh funds is outpacing the supply of fresh ideas - and that's bad news for investors. Why? Because launching new funds with similar mandates only adds to costs and paperwork, without offering anything meaningfully different in the underlying portfolios. More ≠ better: The hidden overlap problem Let's substantiate our previous statement as to why investing in more funds doesn't add much to our bottomline. In order to this, our research team took the five largest active large-cap funds - HDFC Large Cap, ICICI Pru Bluechip, Mirae Asset Large Cap, Nippon India Large Cap and SBI Bluechip - to check how similar their portfolios are to each other with the help of Value Research Online's Fund Compare tool . The heat-map graphic lights up like a summer afternoon. Portfolio overlap peaked at 59 per cent between HDFC Large Cap and Mirae Asset Large Cap. Even the least resembling large-cap funds, Nippon India Large Cap and SBI Bluechip, had 46 per cent stocks in common. Stocks of HDFC Bank, ICICI Bank, Larsen & Toubro, Reliance Industries and Infosys are part of all the five funds, while Axis Bank appears in four. That is six stocks accounting for a chunky slice of each fund. Add two or three more usual suspects and you have the bulk of the "diversification" done.

This article was originally published on April 28, 2025.