Adding more mutual fund SIPs often leads to portfolio overlap and over-diversification rather than better returns. Investors should focus on distinct investment mandates and asset allocation rather than just increasing the number of schemes.
Many Indian investors believe that holding a large number of Systematic Investment Plans (SIPs) naturally lowers risk and improves returns. However, piling on too many mutual fund schemes often leads to a trap known as over-diversification. When a portfolio becomes cluttered with too many funds, it frequently results in significant overlap, where multiple schemes end up investing in the same set of stocks or following identical strategies.
The Problem of Portfolio Overlap
Over-diversification can dilute potential gains and increase concentration risk. If you hold several funds within the same category, such as multiple large-cap or flexi-cap funds, there is a high probability they hold the same top-performing stocks. This creates an illusion of diversification while essentially duplicating your exposure to specific companies. When portfolios have an overlap exceeding 40% to 50% between schemes, it is often a sign that the investor is not gaining any real benefit from adding the additional fund.
Building a Balanced Portfolio
Instead of chasing new fund offers (NFOs) or trending themes, a disciplined approach is more effective for long-term wealth creation. Expert perspectives suggest that the ideal number of funds should align with the size of your investment corpus. For instance, a smaller monthly investment of ₹10,000 to ₹15,000 is often well-served by 4 to 6 funds, while larger portfolios may accommodate more. A common recommended framework for equity portfolios involves allocating across market caps, such as 55% in large-caps, 25% in mid-caps, and 20% in small-caps.
Identifying Unnecessary Schemes
A simple test for any investor is to ask if each fund in their portfolio serves a distinct purpose. If you cannot explain why a particular fund is in your portfolio or if it shares the same sector concentration and investment style as your existing holdings, it may be time to consolidate. Investors should avoid the common pitfall of reacting to short-term market phases, such as panic-selling during a correction or buying into every new fund launch without reviewing its underlying mandate.
Steps for Portfolio Review
Before starting a new SIP, evaluate your current holdings for sector concentration and portfolio overlap. If your existing funds already cover different market segments and styles, it is often more beneficial to increase the SIP amount in your high-performing existing funds rather than adding a new one. Periodic rebalancing and ensuring your total allocation aligns with your risk tolerance and financial goals are critical steps. Tracking how much of your portfolio is concentrated in a few sectors or companies can help you maintain a genuinely diversified investment base.