Last Updated on June 12, 2020 at 10:09 am
Are you a young earner, who has just started investing in mutual funds? Have you started multiple SIPs (3,4,5 …) in mutual funds from the same category or type? Here is why this is a mistake and you need to stops some SIPs and consolidate your investments before it becomes a mess.
Rs. 500 or Rs. 1000 SIP each in three or four large cap funds and the same number in mid cap funds. Rs. 1000 SIP in five multicap funds. Rs. 1000 SIP in two Nifty funds and two Sensex funds. Sounds like a grocery list, but these are some real portfolios that caught my eye in the last few days.
One member in FB group Asan Ideas for Wealth had as many as 16 (micro) SIPs in an array of equity and debt funds and the total amount invested was fairly minuscule. This practice of advisors (human or robot, regular plan or direct plan) recommending multiple SIPs in funds from the same category must stop (or at the very least ignored).
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Those who cannot shoot straight are recommended shotguns that spray tiny pellets instead of a solid bullet. When you choose a single mutual fund over a stock portfolio, you have already got yourself a shotgun. Buying funds of the same category is choosing to fire from multiple pellet shotguns at the same target.
There are only 100 large cap stocks to choose from and if you buy say three large cap funds, the overlap in their portfolios would be significant. You would just be buying more of the same stock with zero additional benefits. See: Compare five fund portfolios for common stocks with new overlap tool! This is also true of mid and small cap funds too – our stock market is smaller than you think (we have small cap funds holding HDFC bank for liquidity and stability)
This is not diversification. This is diworsification.
Diversification is when you add one unit of a different entity to lower overall portfolio volatility (in value and returns). Diworsification is investing small amounts in identical entities, “just in case”.
There is no “averaging benefit” in diworsifying. You may ask, “how do you know there is no such benefit?” My response, “how do you know there is?”Everyone knows the benefits of not keeping all our eggs in the same basket but when I asked investors a simple enough question, “how do you know your portfolio is diversified?”, not one was able to provide a relevant answer (well, Siva from AIFW did, but he is a pro).
So even for a one Nifty index fund and one Nifty Next 50 index fund equity portfolio – which is perfectly fine as the portfolio has a zero overlap by definition – I doubt if most investors could quantify the benefit of the additional fund in the portfolio.
The simple reason being, most investors do not invest in MFs, they invest in SIPs. They want a replacement for an insurance policy or RD- something they can invest each month in, wake up after a few years and get the “maturity value”. To most investors, diversification only means adding different entities (within the same asset class). They know nothing about rebalancing among them periodically and quantifying the benefits of said addition.
If this is the case with a necessary addition, it can be said with fair confidence that an unnecessary addition (buying more of the same) would meet the same or worse fate. Instead of trying to average out the performance of active fund managers investing in the same stock universe, does it not make much better sense to buy one/two index funds and invest in peace? Two here refers to Nifty + Nifty Next 50.
It certainly is a simpler option but that should not stop investors from making the same mistake again: Why is everyone talking about Nifty and not Sensex? Am I missing something if I do not have Sensex funds? How about Rs. 1000 in one Sensex fund and Rs. 1000 in Nifty just in case.
Hang on. What if that one Sensex or Nifty drops in star ratings? Is it not better to have two Nifty index funds and two Sensex index funds (Rs. 500 SIP in each naturally). In this case, too it is would fairly impossible to determine the benefit of the extra fund even if one knew how to.
All that is going to happen is higher portfolio clutter, one more row to look at daily in your “on the go” mobile app, one more thing to worry about. Yes, it is so easy to monitor multiple funds “these days” but that does not mean we should do it, especially when we are clueless about what to monitor, when and how.
The lack of a plan and the lack of confidence in investing in mutual funds cannot become be more clear when one sees such a portfolio. This is a wonderful time to stop additional those Rs. 1000/Rs. 500 SIPs in similar funds, and reduce, make that eliminate similar funds from the portfolio and consolidate.
Why? Take a look at how all the funds in a category reacted to the crash. They all fell pretty much to the same extent. This averaging strategy will not help during the only time it should! Wait a minute, did I just hear you think, “but my Axis Small Cap, Mid Cap and Blue Chip did not fall so much, na?” Oh, how I wish I could leap from your screen to deliver a good thumping.
If someone says, “this is my first year in mutual funds, I got 25% gains and I want to book some profits” there is at least some half-baked emotion-driven logic there. There is not even that in diworsification.
Investors alone are not to blame for this. Human and robo advisors (all kinds, all plans) and journalists are to blame for shaping such thinking. At least in the case of regular plans, I can understand if the advisor wants to maintain a “cordial relationship” with all the AMCs he/she is empanelled with. There is no excuse if a direct plan robo portal does this.
- If you have Rs. 1000 to invest a month, you need only one fund (one Nifty or Sensex index fund)
- If you have Rs. 5000 to invest a month, you need only one fund (one Nifty or Sensex index fund)
- If you have Rs. 10000 to invest a month, you need only one fund (one Nifty or Sensex index fund)
But what about Nifty Next 50? It can wait for a year. Get used to investing in one fund first. Unless you have a few lakhs invested, there is little logic of benefit in buying more funds from the same category. Please do not diworsify. It does not average performance. It does not provide safety. Your portfolio would thank you later.
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