Nutan Bose has been investing for 8-9 years, relying mostly on her own research. Her portfolio includes 10 equity funds, seven debt funds, a liquid fund, a gold fund, and two international funds. Cautioned against putting all eggs in one basket, she diversified heavily to reduce risk. Yet, returns remain mediocre. She now wonders—has she over-diversified?
Nutan Bose has a haphazard portfolio with all kinds of schemes. Bose will do well to appreciate that this habit of lapping up anything in the name of diversification tends to do more harm than good. Diversifying beyond a threshold tends to hurt returns. While she may think she is playing safe by adding more schemes to her portfolio, this is not always true. After a point, having more funds may not offer any value to her portfolio.
Also read | Investing in too many mutual funds can hurt your returns: Know what experts advise about maximum number of mutual funds to have
Obviously, holding many funds makes it that much more difficult to keep track of all investments and their performance. Also, it may be worth noting that even if there are good schemes in her basket, it may not reflect in the portfolio returns because their contribution will be diluted by too many slackers. Moreover, owning too many mutual funds will not give her the diversification benefit if all the schemes own the same kind of stocks. Thus, she should grab a share of a mix of funds that have exposure to different segments of the equity market. Similarly, she can have exposure to both long and short tenure bond funds.
Nutan Bose has a haphazard portfolio with all kinds of schemes. Bose will do well to appreciate that this habit of lapping up anything in the name of diversification tends to do more harm than good. Diversifying beyond a threshold tends to hurt returns. While she may think she is playing safe by adding more schemes to her portfolio, this is not always true. After a point, having more funds may not offer any value to her portfolio.
Also read | Investing in too many mutual funds can hurt your returns: Know what experts advise about maximum number of mutual funds to have
Obviously, holding many funds makes it that much more difficult to keep track of all investments and their performance. Also, it may be worth noting that even if there are good schemes in her basket, it may not reflect in the portfolio returns because their contribution will be diluted by too many slackers. Moreover, owning too many mutual funds will not give her the diversification benefit if all the schemes own the same kind of stocks. Thus, she should grab a share of a mix of funds that have exposure to different segments of the equity market. Similarly, she can have exposure to both long and short tenure bond funds.
So, how many funds should Bose have in her portfolio? There is no one-size-fits-all answer, but 3-4 diversified equity funds (including some passives as well), 1-2 bond funds and a gold and international fund each should be enough to create a well-diversified portfolio. It is time Bose got her portfolio back in shape!
Content on this page is courtesy Centre for Investment Education and Learning (CIEL).
Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)