I have a habit of investing in too many funds of the same category, as I am very conservative. But what's wrong with this if I can easily manage to track all of them?
- Amlan Basak
You are not alone. I was like this in 1990. But in 1990, there was no open-end fund and one could not do an SIP. You could invest only in some closed-end funds, as and when they were launched.
I don't think there is any fundamental problem in doing this, except the fact that when you hold too many funds, they hold very little percentage of your total corpus and you get less interested in them. Also, having too many funds does not have an advantage.
Let me give you some interesting information. Millions of people manage their portfolios on Value Research and I was analysing them. On average, the count of funds, held by an individual is 25. I am not very precise with the number but it is somewhere around 25.
When you are investing in an actively managed fund, you are paying a management fee to the fund manager for beating the market. And when you invest in 25-30 funds, your portfolio ends up being an index fund at the fundamental level. About 30-50 per cent of the stocks in all your funds would be the same. So, the alpha or extra return over the risk assumed by the fund manager is lost.
Also, let's come back to the interest part I was talking about. If you have 25-30 funds, you will have about 3-5 per cent of your portfolio in each of them. When a fund does poorly, you think it does not hold much of money and you don't bother much. If it does well, it does not have any meaningful impact because it holds a very small amount of your total corpus. And the entire objective of long-term investment should be to get a superior performance for which, you are paying to the fund manager and that too in a convenient way.
If you invest in a few funds, they hold a larger share of your total wealth and you get more interested in them. A poor performance will prompt you to take the necessary action. And a great performance will please you. So, I believe having too many funds actually distracts you from acting when they perform poorly.