Many Indian investors hold several SIPs, believing it increases diversification. However, owning too many funds often leads to holding the same large-cap stocks across different schemes, creating a false sense of security. Instead of adding more funds, investors should check their actual holdings and focus on consolidating their portfolio to avoid unnecessary costs and concentration risks.
Many retail investors in India believe that holding multiple Systematic Investment Plans (SIPs) is the best way to diversify. They might hold five or six different funds from various mutual fund houses. However, having more funds does not always mean a safer or more diversified portfolio. In many cases, it creates a false sense of security while actually concentrating investments in the same set of stocks.
The Large-Cap Overlap Problem
The primary reason for this overlap is the current regulatory framework. The Securities and Exchange Board of India (SEBI) requires large-cap mutual funds to invest at least 80 percent of their assets into the top 100 companies by market capitalization. Because most large-cap funds are chasing the same pool of top companies, there is a high chance that several of your funds own the same stocks. If you have three different large-cap funds, they may effectively be tracking the same market index, which means you are not actually diversifying your risk.
Identifying Duplicate Holdings
To identify if your portfolio is truly diversified, you need to look beyond the fund names and check the actual holdings. Investors can visit the websites of their respective mutual fund companies, which are mandated by SEBI to disclose their portfolio overlap figures every month. By comparing these figures, you can see if your funds are essentially buying the same things. It is also important to consider sector concentration. Even if two funds own different specific companies, they might both be heavily invested in the financial services or technology sectors. This leaves you vulnerable to the same market cycles, defeating the purpose of spreading your money across different funds.
Strategies for Portfolio Consolidation
If you find that your portfolio has too much overlap, the solution is not necessarily to sell everything immediately. Selling your units in a hurry can trigger exit loads, which are fees charged for withdrawing money early, and can also lead to capital gains tax. A more efficient approach is to simply stop the SIPs in the redundant funds. You can then redirect that money toward the schemes you want to keep. This allows you to gradually lean out your portfolio without forcing a tax event.
Monitoring Your Next Moves
True diversification is about balancing different types of assets, such as mixing equity funds with debt funds or other asset classes, rather than just accumulating more fund names. Investors should regularly review their portfolio to ensure that each fund serves a unique purpose, such as a small-cap fund for growth or a debt fund for stability. The next time you check your investment statement, focus on the underlying company holdings rather than the number of active SIPs you currently hold.