I want to start my sip with Rs 4000 (in total) so can you please suggest how will I allocate Rs 4000 to three funds or shall I go ahead with 2 funds as of now?Asked
Investments usually work on the principle of “Don’t keep all your eggs in the same basket”. Diversification is the key. However, diversification works only to an extent. So what is the ideal diversification for your investment?
Well the answer lies in the amount you want to invest. For people wanting to invest approximately five to six thousand rupees a month, one or two mutual fund schemes are ideal. With people investing more, they can have three to four mutual funds. But having even more funds would not give you any additional risk cover. The reasons for this phenomenon are as listed.
Firstly, any investor should periodically check the performance of all its portfolios to see if they are giving the desired returns or not. More the number of mutual fund schemes, the more tedious the job gets and it leads to poor portfolio management.
Also, mutual fund schemes are nothing but a collection of stocks and debt securities. Having more than four or five schemes might lead to overlap of the securities across funds. This would lead to having more of the same securities which will lead to higher risk rather than diversifying it.
Thus, though the general rule encourages investors to diversify, it is important to know that it is not always true. The best idea is to clarify your investment objective with your fund manager and let him take a call on how many funds are ideal for investment.