Systematic Investment Plans (SIPs) have transformed the investment landscape for Indian retail investors by allowing them to begin investing with a minimum monthly contribution of Rs 5,000. But here’s the catch – many first-time investors think that splitting that Rs 5,000 across five different mutual funds is smart diversification. Some experts believe that this is a common mistake. “You face an excessive amount of work because you divided your money into too many parts, which we refer to as ‘diworsification’,” said Ashish Anand, Partner, Fortuna Asset Managers.
For the uninitiated, ‘diworsification’ is a term coined by Peter Lynch, one of the most successful and well-known investors of all time. It refers to the practice of excessive or improper diversification, where adding more investments actually increases risk, complexity, and reduces potential returns.
The Problem with Too Many SIPs
The process of dividing your Rs 5,000 into five equal parts of Rs 1,000 for SIPs does not help you distribute your investment risk.
“You are just managing five times the paperwork. Multiple funds, which belong to the same investment category, keep their portfolios identical. Most of them will have an overlap of stocks. The different fund names hide identical investment portfolios, which prevent your small investment from growing through compounding effects,” said Anand.
How to Pick the Right Fund
According to Anand, the process of choosing a single scheme becomes overwhelming because there are thousands of options to choose from.
The market develops in ways that no one can predict, so you should abandon your efforts to forecast its next movement. Your age, together with your goal, should receive all your attention.
“If you are young (20s-30s), you have time on your side. You should choose a Flexi-cap or Multi-Cap fund as your investment option. These funds allow managers to shift investments between large corporations and small, fast-growing businesses based on market conditions. The resource functions as an all-inclusive foundation which lets me get started right away. If you have specific goals (40s-50s): If you are saving for a goal 5-7 years away, stability matters more. A Large-cap fund or a Balanced fund is safer. Before buying, look at the fund manager’s experience and the expense ratio (the fee they charge),” he said.
Let’s Understand This With A Simple Calculation
According to Anand, if you split your Rs 5,000 into five SIPs of Rs 1,000 each, you won’t get any extra returns, as most funds perform similarly.
“If you are spending Rs 5,000 in one mutual fund, you’ll end up with a corpus of about Rs 25.2 lakh in fifteen years, considering the return of 12-13 per cent. If you invest in five funds that return 14 per cent, 12 per cent, 11 per cent, 10 per cent, and 9 per cent, the overall return is 11.2 per cent. This means you’ll end up with a corpus of around Rs 23 lakh. So you could lose Rs 1.5-2 lakh,” Anand explained.
Managing multiple funds can be a hassle, and therefore, here’s what the expert suggests:
- You have to track statements and deal with complicated processes that don’t give you any real benefits.
- The key point is that investing across multiple funds doesn’t provide real diversification.
- You should choose a fund that offers good returns and invest in it.
- This way, you can avoid the hassle. Still get good returns on your investment.
- A single or two good-performing mutual funds can help you achieve your goals.
When Is The Right Time For Diversification
“Maintain your investment in a single strong fund while continuing your regular SIP contributions. You need to wait until your monthly capacity reaches at least Rs 15,000 to Rs 20,000 before you should think about adding another fund for better diversification, Anand concluded.
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(This article is for informational purposes only and should not be construed as investment, financial, or other advice.)