Owning a large number of mutual fund schemes often creates a false sense of security while hiding true portfolio concentration. Many investors end up with significant overlap in their holdings, leading to higher costs and lower returns. Instead of chasing past star ratings, a cleaner portfolio with fewer, well-chosen funds often aligns better with long-term financial goals.
Many retail investors operate under the assumption that adding more mutual funds to their portfolio increases safety. In reality, holding eight to ten different schemes often leads to the exact opposite: an unintentional concentration of capital. This phenomenon, sometimes called 'diworsification,' occurs when investors accumulate products without checking the underlying assets.
The Problem of Portfolio Overlap
The primary issue with owning too many funds is hidden overlap. If an investor holds several large-cap or flexi-cap funds, there is a high probability that these funds are betting on the same 20 to 30 stocks. When a significant portion of an investment portfolio is tied to the same underlying companies, the benefit of diversification—which is meant to spread risk—is completely neutralized. If those specific stocks or sectors underperform, the entire portfolio suffers, regardless of how many different fund names appear on the account statement.
Paying Active Fees for Passive Results
When a portfolio contains too many funds that essentially mirror the same market indices, investors often end up with 'closet indexing.' This happens when funds charge higher active management fees but deliver returns very similar to a low-cost index fund because their stock selection is not distinct enough. By holding multiple funds that track the same sectors or themes, investors pay multiple sets of management fees (expense ratios) while achieving results that could have been attained with a single, lower-cost product.
Why Star Ratings Can Be Misleading
Many investors build their portfolios based on historical star ratings or recent performance tables. However, these metrics look backward. A fund that performed exceptionally well over the last three years may have done so because of a specific market cycle that might not repeat. True portfolio construction is about looking under the hood—analyzing the actual market-cap exposure and the investment style of the fund manager—rather than relying on a ranking that is often based on past outcomes. Wealth creation is generally more effective when the focus shifts from accumulating winning funds to maintaining a disciplined asset allocation.
Addressing Investment Inertia
Another major risk in managing large portfolios is inertia. Investors often hesitate to sell underperforming funds, sometimes due to a reluctance to pay exit loads or taxes, or simply because of an emotional attachment to an investment that was previously a 'star.' Keeping an underperforming asset indefinitely just to avoid a small tax or exit cost can act as a drag on long-term wealth creation. Investors should periodically evaluate whether a fund’s original mandate has changed, or if it is consistently failing to meet its risk-adjusted performance goals compared to its peers.
Simplifying for Better Oversight
As a financial portfolio grows, complexity becomes a risk. A cleaner, more focused portfolio is generally easier to monitor and rebalance. Instead of tracking ten different statements, investors can gain better control by narrowing their holdings to a few well-researched funds that offer distinct exposure. This approach helps in aligning the portfolio with specific financial goals and risk tolerances, ensuring that the investment journey remains structured and manageable.