The most common dilemma in the minds of investors looking to build wealth through Systematic Investment Plan (SIP) in mutual funds is how to divide an investment of ₹20,000 per month across how many funds. Often new investors start SIP of ₹2,000-₹2,500 in 8 to 10 different schemes in the name of security. According to financial experts and Chartered Accountants (CAs), this strategy hurts the portfolio rather than providing benefits.
In financial language it is 'Over-diversification' Or 'Portfolio Cluttering' It is said. When you spread ₹20,000 across 8-10 funds, many funds invest in similar stocks (like HDFC Bank, Reliance, Infosys, ICICI Bank). This is called 'portfolio overlap'. The result is that the investor has to pay the higher expense ratio of many funds, without getting any additional return. For monthly SIP of ₹20,000 3 to maximum 4 funds A balanced bouquet is considered the most ideal.
For a sound, long-term and risk-adjusted portfolio the allocation of capital should be balanced across different market capitalizations (large, mid, small cap):
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1. Flexi Cap Fund — ₹7,000 (35%): It forms the backbone of the portfolio. The fund manager can flexibly switch between large, mid and small caps depending on market movements, thereby providing constant stability to the portfolio.
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2. Large & Mid Cap / Nifty 50 Index Fund — ₹5,000 (25%): Direct investment in the top 50 or 100 leading companies of the country, which provides capital protection and low volatility even during extreme market downturns.
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3. Mid Cap Fund — ₹5,000 (25%): Emerging mid-sized companies that have the potential to become future large caps. This part helps in generating alpha (excess returns) in the long run.
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4. Small Cap Fund — ₹3,000 (15%): High risk but very fast growth segment. Over the long term (7 to 10 years or more) this component has the potential to drive overall portfolio returns to 14% to 15% levels.
If you continue this monthly installment of ₹20,000 with discipline at an average historical CAGR of 12% to 14%, the effect of compounding will look like this:
| time period (years) | total principal amount | Fund at 12% annual return | Fund at 14% annual return |
| 5 year | ₹12,00,000 | ₹16,49,700 | ₹17,35,000 |
| 10 years | ₹24,00,000 | ₹46,40,790 | ₹52,41,800 |
| 15 years | ₹36,00,000 | ₹1,00,91,520 | ₹1,23,08,500 |
| 20 years | ₹48,00,000 | ₹1,99,82,960 | ₹2,63,27,000 |
The table shows that the total deposit in the 15th year is only ₹36 lakh, but even at 12% your total corpus crosses ₹1 crore.
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1. Problem of Overlapping: When you buy 8 different equity funds, the same 15-20 blue chip stocks repeat again and again in the top holdings of almost all the funds. You think you're diversifying, but really you're buying the same stock multiple times.
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2. Diluted Returns: If one fund gave a stellar return of 35%, but your SIP in it was only ₹1,500, then that stellar performance will not have much of an impact on your overall portfolio.
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3. Complexity of portfolio tracking and tax: Handling capital gains statements, rebalancing and tax filing (LTCG/STCG) of 8 to 10 funds becomes extremely complex.
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4. High Expense Ratio: By having multiple active funds, you end up paying a part of your capital unnecessarily as management fees to fund houses.
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Select Direct Plan: Always invest in Direct Growth Plan instead of Regular Plan. This saves brokerage commission of 0.75% to 1%, which can add up to an additional corpus of ₹15 to ₹25 lakh over 15-20 years.
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Adopt 10% Step-Up SIP annually: As your income increases, increase your SIP by 10% every year (i.e. ₹20,000 to ₹22,000). With a 10% step-up, your corpus in 15 years can reach ₹1.75 crore instead of ₹1 crore.
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Review once annually: Leave the habit of looking at NAV every month or every week. Just once a year, compare the performance of your 3-4 funds with their benchmark index. Only if a fund is lagging its benchmark for 2 consecutive years, switch to a better fund.