I hold 10 different mutual funds for diversification. Is this better than just holding 2 or 3 index funds?

Question

I have been investing for about four years and have accumulated 10 different mutual funds in my portfolio.

I hold Nifty 50, Nifty 500, Nifty Total Market and a few others.

I thought buying more funds equals better diversification and lower risk.

Am I actually diversified or just overcomplicating my investments?

Sachin Kabra · Accepted Answer

Simply buying more mutual funds does not equal better diversification. You are likely suffering from the illusion of diversification due to heavy portfolio overlap. Consider a portfolio with just 3 funds versus your portfolio of 10 funds. You might assume your 10 funds are safer and more diversified. However a 3-fund portfolio might have a 14% exposure to the top five market heavyweights like HDFC, ICICI Bank, Reliance, Infosys and Bharti Airtel. Meanwhile your 10-fund portfolio might have a 28% concentration in those exact same five companies. This happens because many indices hold the exact same stocks. For example the Nifty 50 and Nifty Total Market have a 57% overlap. It gets even worse with broader indices as the Nifty 500 and Nifty 200 have a massive 86% overlap. If you invest in highly overlapping funds you are not diversifying but actually concentrating your risk. To keep investing simple and effective you should stick to two or three funds with minimal overlap. Disclaimer: All information shared above are strictly for educational and informational purposes only. It should not be construed as financial or investment advice.

I hold 10 different mutual funds for diversification. Is this better than just holding 2 or 3 index funds?

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