Diversification is not the answer to planning your investments


Posted By : Kushal Kothari
Tags :  funds Redeem Switch

A controversial statement, isn't it? After all, isn't the entire financial industry extremely gung-ho about the benefits of diversification? Diversification offers better risk management, diversification offers steady returns, diversification is the professional way to invest.....etc. Well, all of that is true and yet we stand by what we stated above. You ask how? Let us start by understanding what diversification means in the first place.

Diversification is the process of expanding your portfolio to include various asset classes and securities to reduce your exposure to any systemic risks 

In simpler words, "Don't put all your eggs in one basket". Hold equities, fixed income instruments, gold and so on, so as to avoid seeing your portfolio bleed when any single asset class suffers from its usual economic cycle. It also means having various securities of each asset class to ensure no particular holding hampers your portfolio returns. And it is in this pursuit, that many many investors go on about investing in as many schemes as they can. Because, you know, diversification. Except for one thing - 

 

Mutual funds are already supposed to be diversified!

 

Each scheme has its objective that clearly states the kind of asset it will invest in and the investment philosophy behind their selection. Yet, investors are sometimes too afraid to make an unpopular - even if better researched - decision and end up investing in the best-rated scheme of the month. Over a period of time, this transforms their portfolio to a mix of schemes that makes it almost impossible for the average retail investor to make any sense of. Their portfolio is not built out of a strong motive to diversify, but out of incapability to commit to an investment plan. 

 

Ok, even if that's the case - why is that bad?

Have you ever driven on a packed highway, saw the other lane moving faster, switched lanes only to find yourself stuck there again? Well, sticking to an investment plan is somewhat like that. Pick a few schemes that justify your asset allocation and stick with them, unless over years you really find the plan not meeting your desired returns. Else, it's just a frenzy and you are only exposing yourself to invest in schemes/fund managers that will eventually diversify away your good returns! If a fund manager is delivering good returns, why would you go out looking for another one, who may be that good?

 

Hmm. That makes sense. But I have already invested in a plethora of schemes. What should I do?

1. Weed out the underperforming, underinvested schemes by switching/redeeming from each Fund house website. Or do so at the click of a button from your Dashboard on Expowealth
2. Contact a good financial adviser. Preferably one that is not trying to sell you products. Or choose one of the many shortlisted schemes we have on our portal (Based on risk, consistency and returns).


Rebuild a healthy portfolio and keep tracking it regularly and review your investment plan periodically. 

What do I need to be careful of?

Just make sure you don't redeem schemes that will attract Short term capital gain tax (STCG). At Expowealth, we tell you exactly how many schemes you can switch/redeem without any STCG. Also, make sure you are out of the exit load period. Again, all the exit load data is available on Expowealth

 

Hope this helps.

 

Happy investing!