More mutual funds don't mean better diversification, experts warn
Get the Finance newsletter
Daily finance — markets, central banks, M&A, the prints that move money. Free.
- Rhishabh Garg, CEO of FundsIndia.com, said two mutual fund schemes with different names can still carry significant overlap in holdings and investment styles, so adding a fifth or sixth fund may simply duplicate existing exposures rather than reduce risk.
- Amitabh Lara, executive director at Anand Rathi Wealth Limited, audited roughly 13,600 mutual fund portfolios and found that 16% underperformed the Nifty 50 while 86% underperformed the firm's model portfolio — despite investors holding multiple funds.
- Lara demonstrated that a hypothetical portfolio spanning seven categories — large-cap, flexi-cap, focused, dividend-yield, contra, value and Nifty 50 index funds — remains heavily tilted to large-caps, with large-cap funds at ~82% large-cap exposure, focused funds ~65%, dividend-yield ~67% and contra funds ~55%.
- Lara showed that splitting ₹1 lakh each across SBI Large and Mid Cap, HDFC Flexi Cap and ICICI Prudential Focused Fund leaves an investor with roughly 27–30% of the portfolio in banking, the top sector across all three funds.
- Garg argued smaller investors are often better served by two or three funds with distinct exposures than by spreading a ₹5,000 monthly SIP across five schemes, and flagged the clearest warning sign: when an investor cannot say what a particular fund adds that another does not.
- Lara urged investors to regularly benchmark portfolio performance and review underlying sector and market-cap exposures rather than relying on fund names or categories as a proxy for diversification.
Why it matters: Indian retail investors routinely add funds to chase diversification but Lara's audit of 13,600 portfolios found 86% underperformed a model portfolio, with concrete examples showing how a seven-fund portfolio can still be ~82% large-cap and a three-fund portfolio can run 27–30% into banking — meaning the next fund added may inflate complexity without trimming real risk.
Ask SkimNews
