sqrrl- over diversification of mutual funds

Cool title, but what’s the news?

Investors have a single aim – to reap great returns. They attempt to diversify their mutual fund portfolio, by investing in different top performing schemes. But recently, many mutual fund investors have discovered the perils of over diversification. They’ve realised that a portfolio full of similar schemes, would only reduce their net profits. Diversification saves you from the risk, but over diversification often leads to lower returns. You should clearly know the difference between the two, in order to be a successful investor. 

? Okay, so what does it mean? 

Diversifying across different categories does give you an advantage when a category is underperforming.  Nevertheless, having various schemes in the same category can harm your money when the category goes through bad times. Also, over diversification makes your portfolio unmanageable. The best tip is to select one scheme from each category! Although experts can help you a great deal in choosing your schemes, there’s no guarantee of returns. That also happens because experts are muted when it comes to sell recommendations. Investors have confirmed that over diversification has always done more harm than good. Rather than being a rolling stone that gathers no moss, you should try to be a consistent investor!

? I get it, now tell me why should I care?

The bigger picture : 

We totally understand your concern regarding the investment of your hard earned money. Hence, always try to stick to consistent performers, rather than chartbusters. Recommendations are done only to keep you informed about the consistent schemes. In the end, you have to invest the money in various schemes as per your need. Make the smart decision of choosing among different portals and schemes. Choose the one that suits your financial goals in the best possible manner! You could see which scheme is common in all the recommendations, and then go ahead. Always attempt to beat the benchmark consistently. Remember, there could be schemes that perform better than yours, but don’t get demotivated. Stick through it throughout, and it will not let you down. 

For you personally: 

There’s one simple tip: Do not expect profit as soon as you invest and do not chase returns. You really need to have patience in this field. Give your scheme the time it needs to perform. Jumping around in different schemes, in search of returns, would only waste your time. Regularly shifting from an under-performer to a top-performer may give you temporary happiness, but it won’t help in the long run. In the end, you’ll be left with a bloated mutual fund portfolio and minimal returns. Select a scheme that goes with your goal and investment philosophy. Make sure that you have faith in the fund manager, and have the guts to stick with him for a long haul, through times good and bad. After all, persistence is key!

Source: Economic Times

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