If you’re a young earner and a budding mutual fund enthusiast, you’ve likely been advised to allocate 30% of your income to investments. If you earn a substantial amount, committing 30% to SIPs is significant. However, many young investors make the mistake of starting multiple SIPs, perhaps in five different mutual funds of the same type, under the guise of diversification. Here’s why it’s advisable to halt some of those SIPs and streamline your portfolio. Some even invest minor amounts, like Rs 500 or Rs. 1000, in SIPs across four mutual funds of the same category, for example, in four large-cap funds and then in another four mid-cap funds. If you have distinct financial goals, such as saving for your child’s education or a new home, you might feel the need to have separate SIPs in different mutual funds. Alternatively, you can invest in various SIPs in the same mutual fund under different folio numbers for each of your goals. Nevertheless, this isn’t essential since you can withdraw funds as needed from a mutual fund.
Avinash Luthria, SEBI RIA at Fiduciaries, emphasizes the thumb rule to follow when determining the number of funds you should invest in. “Once the total investment in the first MF house surpasses 15% of your portfolio (including FDs etc.), refrain from investing further in that MF house and begin investing in a second MF house. This is to mitigate the risk of poor performance by one Chief Investment Officer and any potential technology issues faced by a single MF house,” Luthria said.
Investor Mistakes with Multiple SIPs:
Diversification in the Wrong Sense: Diversifying exposure in a portfolio isn’t reliant on the number of funds but rather the stocks the funds invest in. With only 100 large-cap stocks available, investing in four large-cap funds will lead to significant overlap in your portfolio. Hence, focus on having more funds from different categories rather than more funds overall. One fund in each category is sufficient for diversification.
Insufficient Attention to Stock Lists: Instead of investing in different funds of the same category, invest in multiple categories for diversification. Experts typically recommend allocating 40%, 30%, and 30% of your equity to large-cap, mid-cap, and small-cap categories, respectively. Also, since many mid-cap funds invest in select large-cap stocks for stability, overlap may occur. Always review the stock lists of mutual funds to minimize overlap as much as possible.
Excessive Paperwork and Clutter: Choosing multiple funds from the same category results in more paperwork without diversifying the investment. Managing taxes requires information from multiple fund houses, leading to increased effort with more SIPs. Furthermore, for tax-saving mutual funds, you need to keep a record of investments to claim tax benefits, which can be streamlined by consolidating multiple funds in the same category.
Volatility: Investing in different funds within the same stock universe means all funds in a category will react similarly to market phenomena. During a bear phase, they will all drop in value to a similar extent. Therefore, investing in multiple funds within the same stock universe is redundant.
