Mutual Funds: How Many Are Enough? Abhinav came across a series of informative articles about mutual funds and got interested. He liked the idea of investing in mutual fund and wanted to get started with a small amount that he had saved. He knew about the various types of mutual fund schemes and had also learnt about the different ways in which he could invest in them. However, he realized that there were lots of mutual fund houses and too many schemes to choose from. He was not sure how many should he invest in. More about Mutual Funds One must understand that Mutual funds are diverse. Each scheme has its own set of variables, performance indices, objectives and risks. Similarly, every investor has his or her own set of goals, objectives and aspirations. With such widespread choices, one size does not fit all. While there is no thumb rule to quantify the number of mutual funds one should invest in. Investment decisions should be based on ones: Risk Appetite Investment Objectives Investible Surplus For example: A young investor with a higher disposable income and long-term objectives might be able to take a higher risk and opt for a large-cap equity fund; while a retired individual with limited means of income and ongoing expenses, might feel comfortable with instruments such as income schemes. Opportunities for Diversification Even within a risk type, one has the opportunity to diversify. For example within equities, one can opt for diversified funds, sectoral funds, midcap, large cap, small cap, commodity, etc. There are global funds that provide you with diversification across global markets. Based on the objectives and investment horizon, one can consider Equity Linked Savings Scheme (ELSS) that helps you save tax but have a 3 year lock-in. Pitfalls of Diversifying Too Much While putting all your eggs in the same basket is not advisable, one should also not diversify too much as it can lead to the following pitfalls: Replication: Similar funds might have the same underlying stocks, defeating the purpose of diversification. Hence, one needs to be able to identify the underlying securities that the schemes invest in and ensure that the assets are well differentiated. Fund Management Charges: Mutual funds are actively managed by professional fund managers who charge a fee. Extra schemes mean additional charges. These can be avoided by limiting diversification. Keeping Track of your Investments: Too many mutual fund investments can be difficult to manage. Keeping a track of various amounts, lock-in periods, fund documents, statements and folio details can mean a lot of paperwork. Also, in case of an emergency, it might be cumbersome to liquidate all the schemes at once. Services of an Expert Financial Planner While there are no guidelines for deciding the exact allocation among different mutual fund schemes, a financial planner can help you arrive at the right fund for the given set of objectives, risk appetite and investment horizon. The complete financial planner will be able to judge whether your investment aim is growth, safety or both. In addition, he or she can guide you about the right investment route. It could be a combination of lump sum investments and systematic investment plans that encourage regular savings while offering the advantage of rupee-cost averaging. Courtesy : Times of INDIA
Posted on: Wed, 05 Mar 2014 14:53:43 +0000
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