Shopping for mutual funds

"The internet has made it easy to shop for mutual funds". This is an actual statement from a mutual fund investor who appears to have enthusiastically extended the e-commerce experience to mutual funds. Frankly, I find this alarming. The internet has made a lot of information easily accessible, much of it being extremely hard to find or ingest offline.

Take the shopping experience, for example. Let's say you are looking for something mundane, say a mixer-grinder for your kitchen. Depending on how you search, you can find about 750 distinct models listed on Flipkart and about the same number on Amazon. However, if you walk into a physical shop or even several shops in a market, you'll be hard-pressed to come across more than 10 or 20 models, maybe 30.

Suggested read: What's the magic number?

Much the same experience awaits you when you go looking for a mutual fund to invest in. If you talk to a fund advisor/salesman to find an equity fund, you'll be hard-pressed to get information on more than five or 10 of them. However, if you start looking online, you'll find hundreds. On Value Research Online, for example, you'll find full details on all Indian equity funds - which (counting all variations) is a number much larger than all the mixer grinders on Flipkart and Amazon.

This is a problem, to put it mildly. While the tiny number that an advisor offers you is likely chosen for the high commission they bring, wading through hundreds of funds online is just as unlikely to lead you to a great choice. You'll even find selection tools and curated sets on Value Research Online; what is needed is an awareness that there is an optimum number of funds, which is quite low-just three or four are quite enough.

Even by investing in one equity fund, your portfolio will probably be diversified across 20 or 30 stocks. If you add four to five funds of a similar kind, you may get the impression that you are gaining diversification, but actually, you are just creating an accounting overhead.

Also read:
The culture of commissions and why it's a problem
Diversification can be a dummy exercise. So, check this for best result