More mutual funds do not guarantee better diversification, experts warn

Owning several mutual fund schemes does not automatically mean a portfolio is diversified, according to experts cited by Livemint. Rhishabh Garg, CEO of FundsIndia.com, said the number of funds an investor holds reveals little about actual diversification because two different schemes can have significant overlap in their stock holdings and investment styles. He emphasised that genuine diversification comes from combining assets and strategies that do not move in lockstep across market cycles.

Amitabh Lara, executive director at Anand Rathi Wealth, analysed around 13,600 mutual fund portfolios and found that 16% underperformed the Nifty 50, while 86% underperformed the firm's model portfolio. He highlighted how a portfolio spanning seven categories, large-cap, flexi-cap, focused, dividend-yield, contra, value and Nifty 50 index funds, can still be heavily tilted toward large-cap stocks. Lara also gave an example where three different funds all had banking as their top sector, concentrating 27-30% of the portfolio in banking.

Garg said the clearest warning sign of over-diversification is when an investor cannot explain what a particular fund adds that another fund does not. He suggested smaller investors start with two or three funds providing different exposures rather than spreading a Rs 5,000 monthly SIP across five schemes. Lara recommends investors regularly compare portfolio performance with an appropriate benchmark and review underlying exposures.