1.Diversification is healthy only up to a reasonable extent and works against you if you overdo it.
2. After a point, having more funds may not offer any extra value to your portfolio, as you can only reduce risk to a certain extent, beyond which there is no extra benefit.
3. While a single fund portfolio has the highest standard deviation – giving biggest gains or suffering heaviest losses – addition of funds brings down standard deviation significantly, thus reducing the risk.
4. However, after reaching a critical number - around 5 - a portfolio’s standard deviation remains pretty much the same regardless of the number of funds added.
5. Also, it is much more difficult to keep track of your investments when you over-diversify, and the true returns of good schemes will also not get reflected because their contribution will be diluted by the underperformers.
6. Further, there is high chance of duplication and overlapping, as an average diversified mutual fund invests in 40-50 stocks, and two funds from the same category are likely to invest in the same companies and sectors, thus preventing diversification of underlying stocks.
7. Even in a diverse mix of funds, don’t rely on a single fund manager or team, and diversify across fund houses, so that your portfolio health will not be affected even if any fund house goes through a downturn in performance across its schemes for any reasons unique to it.
8. If you diversify too much, you might not lose much, but you won’t gain much either.
2. After a point, having more funds may not offer any extra value to your portfolio, as you can only reduce risk to a certain extent, beyond which there is no extra benefit.
3. While a single fund portfolio has the highest standard deviation – giving biggest gains or suffering heaviest losses – addition of funds brings down standard deviation significantly, thus reducing the risk.
4. However, after reaching a critical number - around 5 - a portfolio’s standard deviation remains pretty much the same regardless of the number of funds added.
5. Also, it is much more difficult to keep track of your investments when you over-diversify, and the true returns of good schemes will also not get reflected because their contribution will be diluted by the underperformers.
6. Further, there is high chance of duplication and overlapping, as an average diversified mutual fund invests in 40-50 stocks, and two funds from the same category are likely to invest in the same companies and sectors, thus preventing diversification of underlying stocks.
7. Even in a diverse mix of funds, don’t rely on a single fund manager or team, and diversify across fund houses, so that your portfolio health will not be affected even if any fund house goes through a downturn in performance across its schemes for any reasons unique to it.
8. If you diversify too much, you might not lose much, but you won’t gain much either.