Should You Invest in More Than One Fund Family
Synopsis
Investors think that investing in 2 funds is improve than ane, 3 is better than two, four is better than three and and so on. Where does this stop?
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By Dhirendra Kumar
We have all heard the saying, "Don't put all your eggs in one basket". The investing version of this thought is diversification and every investor knows that diversification is good. Mutual fund investors generally take this to mean that they should not invest in just one or two funds, simply must spread their investments across lots of funds.
And so they make up one's mind that investing in two funds is better than 1, three is meliorate than two, four is better than three and and so on. Where does this finish? Is investing in 10 funds better than ix? How about xx? Or 50 or even 100? At some signal diversification becomes pointless, then it becomes counterproductive and somewhen it becomes ridiculous. Of course, most investors would consider the limit of diversification every bit strange.
A few years ago someone asked me how many funds he should invest in. I said that three or four was a good number. Later, the person mailed me his portfolio and I realised that while the sense of my answer was that he should invest in no more than than three or 4 funds, he had assumed I'd meant a minimum of iii or 4. Investors think that the way to achieve diversification is to invest in a lot of funds.
Still, the truth is that no boosted diversification is provided by investing in more funds beyond a certain point. Mutual funds are not an investment by themselves. They are a way of holding the underlying investments which, for equity funds, are stocks. The reason why too much diversification is pointless is that the stocks held by similar funds tend to be a similar set. Across a small number, when you add more funds, you are generally adding more than stocks that are like or identical to what you already have. That is not diversification.
Allow's recap why nosotros diversify. Diversification saves your from poor performance of a set of investments. If a detail company or sector does worse than the markets in general, then having only a small role of your money exposed to it helps. Diversification could too be across company sizes equally sometimes only smaller or larger companies do well or desperately. Information technology could also be geographical. Diversification does cypher for you when the entire market place declines. The reason most investors invest in likewise many funds is that someone sells it to them and earns a committee. The investor does not have a clearheaded view of what diversification is and and then thinks that more funds are good.
It's non only a question of their beingness no benefit from investing in more funds, it'due south really detrimental. Having too many funds in 1's investment portfolio devalues one major reward of investing in mutual funds, which is convenience of tracking and evaluating ane'south investments. Have investments in a large number of mutual funds makes this exponentially more than difficult. Periodically, peradventure in one case a quarter, investors should evaluate each fund in their portfolio and see if it's contributing what it'due south supposed to. However, when you have xv or xx funds, most of them bought considering some salesman delivered a hard pitch, and then this practice is impossible. There will exist funds that brand upward two or 3% of your portfolio and it's hard for you to figure out what they are doing there, what you should expect and what difference it would make if they were doing well or badly.
It'due south hard to piece of work towards meeting your financial goals when you lot tin't evaluate and manage your portfolio because it's bloated. The platonic number of funds tends to be three or four, annihilation more is a waste of effort. In fact, depending on the size of someone's investments, it could be even less. For someone investing maybe five or half dozen thousand rupees a month, one or two balanced funds are ideal and anything more than that is pointless. Remember, common funds themselves encapsulate diversification, calculation more funds achieves very little.
(The author is the Founder and CEO of Value Inquiry.)
(Disclaimer: The opinions expressed in this column are that of the author. The facts and opinions expressed here do non reverberate the views of world wide web.economictimes.com.)
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Source: https://m.economictimes.com/wealth/invest/how-many-mutual-funds-should-you-invest-in-find-out/articleshow/60232478.cms
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