Diversification beyond a point does not help, tells Dhirendra Kumar
You always recommend keeping three to five schemes in a mutual fund folio. I have a separate folio for my wife. Should I keep same funds in both the folios?
- Ashish Gokhale
I think so. The reason why I say three to five funds is because too many funds lead to over-diversification and it is not beneficial. If you actually own 10 different types of funds, I would say that go and buy an index fund. You are guaranteed to get it at a lower expense.
Most people invest in an ad-hoc manner. For example, you have Rs 50,000 that got accumulated in your bank account, so you think of investing. While investing is not a regular affair for you, once in a while, you have that Rs 50,000 accumulated and at that time, you invest in whatever is recommended at that point of time. So, you end up being a collector. And that collection of funds is not a great idea. This is because when you end up having diverse types of funds and too many of them, you end up having a portfolio without a focus. Make a choice.
The objective of investing in an equity fund is pretty straight forward. Instant diversification, professional management and your selection should reflect that professional management is adding value. So, be regular with your investments, decide those two-three funds and stick to them. When you have 20 funds, then only 5 per cent of your money is invested in each of them. So, when something goes wrong, you ignore it thinking that not much of your money is invested in that fund. But when you invest across three-four funds only, each of these funds will have around 25 per cent of your money. Since a significant amount would be there, you will be more interested and whenever something goes wrong, you will act on it. So, just for the sake of being interested, it is worthwhile to have three-four funds and diversification beyond a point does not help.