SIP Planning: When investing in mutual funds, it's not always beneficial to add too many SIPs and funds. According to experts, holding too many funds can lead to investment losses.
It is not wise to divide an SIP of Rs 25,000 into 10 places.
SIP Planning: Many investors start investing in mutual funds with a sensible plan. They start a SIP, then add another SIP to save tax, then add another SIP after reading about small-cap funds, and then another fund focused on technology or mid-caps because their returns look attractive online.
A few years later, they suddenly realize they're investing in eight, ten, or sometimes even fifteen mutual funds every month without fully understanding why. Surprisingly, many of those funds often hold the same stocks. This is where over-diversification becomes a major problem.
In fact, for those investing around ₹25,000 per month through SIPs, financial planners say the goal shouldn't be simply to accumulate as much money as possible. The goal should be to build a portfolio that is well-diversified to minimize risk, while also being focused and easy to manage. Beyond a certain point, adding more schemes won't necessarily improve returns or significantly reduce risk. Sometimes, it simply creates confusion.
Too many funds weaken the quality of the portfolio.
A common problem with excessive diversification is that it can dilute the impact of a well-performing investment. If an investor divides ₹25,000 across 10 or 12 funds, the amount invested in each fund becomes significantly smaller. Even if one scheme performs well, its contribution to the overall portfolio may be limited because the money is spread across so many funds. Furthermore, performance evaluation becomes more difficult.
Secondly, many investors eventually give up on whether different funds still align with their goals because it becomes increasingly difficult to manage a portfolio properly. Ironically, this often leads to emotional investing later on. People start or stop SIPs based on short-term performance, rather than maintaining a planned approach.
Diversification and over-diversification are different.
It's crucial to understand that diversification is essential because it reduces the risk of being overly reliant on any one sector, stock category, or investment style. However, over-diversification occurs when investing more doesn't provide any significant risk management benefit and simply leads to overlap. For example, it's like carrying multiple umbrellas in the rain. After a certain point, multiple umbrellas don't provide real protection. Mutual fund investments are similar. Beyond a certain point, having more schemes doesn't automatically make a portfolio safer or better.
