1. Diversification is healthy only up to a reasonable extent and works against you if you overdo it.
2. After a point, having more mutual funds may not offer any value to your portfolio, as an investor can only reduce risk to a certain extent, beyond which there is no extra benefit.
3. While a single mutual fund portfolio has the highest standard deviation – delivering either the biggest gains or suffering the heaviest losses – addition of mutual funds brings down the standard deviation significantly, thus reducing the risk.
4. However, after reaching a critical number – around 7 – a portfolio’s standard deviation remains pretty much the same regardless of the number of mutual funds added.
5. Therefore, there is no need for more mutual funds once you reach a critical number in your portfolio.
6. Also, it is much more difficult to keep track of your investments when you over-diversify and you will not be able to remove the under-performers.
7. Having too many mutual funds will also not reflect the true returns of good schemes because their contribution will be diluted by the slackers.
8. If you diversify too much, you might not lose much, but you won’t gain much either.
9. Further, as you add more mutual funds to your portfolio, there is high chance of duplication and overlapping, as the average diversified mutual fund invests in 40-50 stocks, and funds from the same category are likely to invest in the same companies and sectors.
10. Therefore, owning too many mutual funds does not necessarily give you the underlying
diversification if all the schemes own the same kind of stocks.
2. After a point, having more mutual funds may not offer any value to your portfolio, as an investor can only reduce risk to a certain extent, beyond which there is no extra benefit.
3. While a single mutual fund portfolio has the highest standard deviation – delivering either the biggest gains or suffering the heaviest losses – addition of mutual funds brings down the standard deviation significantly, thus reducing the risk.
4. However, after reaching a critical number – around 7 – a portfolio’s standard deviation remains pretty much the same regardless of the number of mutual funds added.
5. Therefore, there is no need for more mutual funds once you reach a critical number in your portfolio.
6. Also, it is much more difficult to keep track of your investments when you over-diversify and you will not be able to remove the under-performers.
7. Having too many mutual funds will also not reflect the true returns of good schemes because their contribution will be diluted by the slackers.
8. If you diversify too much, you might not lose much, but you won’t gain much either.
9. Further, as you add more mutual funds to your portfolio, there is high chance of duplication and overlapping, as the average diversified mutual fund invests in 40-50 stocks, and funds from the same category are likely to invest in the same companies and sectors.
10. Therefore, owning too many mutual funds does not necessarily give you the underlying
diversification if all the schemes own the same kind of stocks.