Indian mutual fund investors are making the same costly mistake decades after legendary investor Peter Lynch coined the term to warn against overcrowding portfolios. According to reports from Mint, many investors now end up with cluttered portfolios containing 20 to 30 different mutual fund schemes, but collecting a large number of funds does not guarantee proper diversification. As reported by Mint, spreading investments too thin has its own pitfalls, with investors often duplicating exposure because multiple schemes within the same category hold very similar underlying stocks.
Amol Joshi, founder of Plan Rupee Investment Services, explained that true diversification isn't achieved by simply adding more funds to your basket. As reported by Mint, investors can identify overlaps by reviewing monthly factsheets published by mutual fund houses and comparing top stock holdings of each scheme. If primary holdings look nearly identical, investors are likely just duplicating their exposure. Joshi recommends focusing on a small number of complementary schemes that balance each other out, with new schemes only considered if they do something meaningfully different for the portfolio.
The term 'diworsification' was originally coined by legendary Fidelity fund manager Peter Lynch in his investing classic 'One Up on Wall Street', warning against expanding blindly into too many assets. According to Mint, a portfolio with too many mutual funds runs the risk of mirroring the broader market and losing the ability to beat it. Ankur Punj, managing director and business head at Equirus Wealth, noted that when investors hold too many equity funds, their portfolio starts to resemble the broader market, blunting the portfolio's ability to outperform.
The practical burden of tracking so many funds creates significant challenges for investors. As reported by Mint, reviewing and rebalancing among 5 to 10 funds is manageable, but reviewing 20 or more funds across different categories and asset management companies can be cumbersome. This complexity often leads to ineffective portfolio management and reduced returns.
A cleaner approach involves starting with a target asset allocation and choosing one or two schemes per category. According to Mint, Nisreen Mamaji, certified financial planner and founder of MoneyWorks Financial Services, suggests 8-10 mutual fund schemes are adequate for most investors, depending on their goals and timelines. These could include combinations of large-, mid-, and small-cap funds, flexi-cap and multi-cap funds, debt funds for stability, hybrid funds for medium-term goals, and multi-asset funds for automatic diversification across asset classes.
