Many Indian investors mistakenly accumulate a high number of mutual fund schemes, believing it increases diversification. In reality, this often leads to hidden concentration and higher costs. Instead of chasing short-term performance, investors may benefit more by aligning their investments with specific financial goals and understanding underlying stock overlap.
Indian investors frequently fall into the trap of collecting mutual fund schemes, assuming that a higher number of folios automatically equals a safer, more diversified portfolio. While diversification is a fundamental principle of investing, the practice of simply adding more funds often leads to the opposite result, creating what financial experts call portfolio clutter.
The Problem of Hidden Concentration
The primary issue with holding too many mutual fund schemes is the risk of portfolio overlap. For example, if an investor holds five different large-cap mutual funds, they likely own the exact same top 10 stocks across all of them. This creates a situation known as 'closet indexing,' where the investor is paying separate expense ratios for funds that essentially track the same major companies. In this scenario, the investor is not truly diversified; they are simply heavily concentrated in a specific set of stocks without realizing it.
The Cost and Tax Impact
Beyond concentration risk, having too many funds can negatively impact overall returns due to costs and taxes. Each mutual fund scheme comes with its own expense ratio, which is the annual fee charged by the fund house to manage the money. Holding ten different schemes means ten layers of management fees, which can slowly eat into the long-term wealth creation potential of the portfolio. Furthermore, frequent switching between funds in an attempt to chase the latest top-performing scheme often triggers capital gains tax implications, which further drags down the net returns.
Moving Toward Goal-Based Investing
To build a healthy portfolio, the approach should shift from chasing the current best-performing fund to aligning investments with specific life goals. Whether the objective is saving for a child's education, retirement, or buying a home, the investment strategy should be driven by the timeline and risk appetite rather than media buzz or recent high returns. Sophisticated investors are increasingly using tools to check the overlap between their existing funds. If two or more funds hold a significantly high percentage of the same stocks, it may be a signal to review whether both funds are necessary.
What Investors Should Monitor Next
Investors may find it useful to periodically review their portfolios to check for overlap. A simplified portfolio with a few well-chosen funds—such as a combination of large, mid, and small-cap or index funds—is often easier to manage and track. The key monitorable for investors is not the number of schemes held, but whether the asset allocation matches their long-term financial goals and risk profile. Understanding the underlying holdings of each fund, as disclosed in monthly fact sheets provided by asset management companies, remains one of the most effective ways to ensure true diversification.