Dodgy Diversification Alert! Holding Too Many Mutual Funds Could Tank Your Returns!

The article explains that holding too many mutual funds does not automatically equate to better diversification and can, in fact, lead to 'over-diversification' and 'duplication' of underlying assets. Financial planners state that most equity funds already hold a significant number of stocks, meaning investors might own the same stocks through different schemes. This practice complicates portfolio management without effectively reducing risk and can dilute returns. Experts recommend limiting the number of funds based on portfolio size: 3-4 for portfolios up to ₹25 lakh, 4-6 for around ₹50 lakh, and a maximum of 8-10 for ₹1 crore or more. They also advise against holding multiple funds in the same category. To detect overlap, investors should review fund factsheets for top holdings and sector allocations.

Impact This news provides crucial guidance for individual investors to optimize their mutual fund portfolios, potentially leading to better risk-adjusted returns and simplified management. Widespread adoption could indirectly influence investment behavior and fund flows. Rating: 7/10

Difficult Terms: Diversification: Spreading investments across various assets to reduce risk. Duplication: Holding the same or very similar assets through different investment vehicles. Over-diversification: Holding too many investments, leading to diminishing benefits and increased complexity. Portfolio Size: The total value of an investor's financial assets. Large-cap fund: Fund investing in large market capitalization companies. Mid-cap fund: Fund investing in medium market capitalization companies. Small-cap fund: Fund investing in small market capitalization companies. Flexi-cap fund: Fund investing across any market capitalization. Multi-cap fund: Fund investing across large, mid, and small-cap stocks with fixed allocations. Hybrid fund: Fund investing in a mix of equities and debt. Debt fund: Fund investing in fixed-income securities. Fund Factsheets: Documents detailing fund information, holdings, and performance. Top Holdings: The largest investments within a fund's portfolio. Sector Allocation: Distribution of investments across different economic sectors. Volatility: The degree of variation of a trading price series over time.