When you buy mutual funds, you are actually purchasing a portfolio of securities. These securities might be stocks, bonds, REITs, derivatives, or a mix of them. There are around 1,590 mutual funds as of today, of which 441 are open-ended equity mutual funds, 349 are debt funds, 172 are hybrid funds, 254 are Exchange Traded Funds (ETF), Fund of Funds (FoFs) and gold mutual funds, and 374 are closed-ended and interval funds.
As a result, picking funds becomes a difficult process. This is exacerbated when each major category, such as equity and debt, is further subdivided into sub-categories comprising several mutual fund alternatives offered by various asset management companies (AMC). For example, in the large-cap equity mutual fund category, there are now roughly 32 choices. And there is a perception that adding more such high-yielding funds will help them achieve better gains. However, this is not the case because it would result in overdiversification.
Diversification is one of the most effective methods that help investors in lowering the overall portfolio risk. However, doing too much or too little might endanger your portfolio. Adding more funds to your mutual fund portfolio frequently results in overdiversification. The value of diversification begins to wane beyond a certain point. This is most likely the outcome of overlapping in the portfolio. As a result, in this piece, we will learn about portfolio overlapping, its influence, how to avoid it, and how to optimise your mutual fund portfolio.
What is Portfolio Overlap?
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Esta historia es de la edición August 01, 2022 de Dalal Street Investment Journal.
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