Is it advisable to diversify SIP of MF among same category funds?

[Vivek_Parmar]

I want to invest monthly 10,000 Rs across all Mutual Funds but out of which I want to dedicate 5000 Rs towards the IT sector. There are various mutual funds available that invest in tech companies. Here are 5 that I have shortlisted.

• ICICI Prudential Technology Fund
• SBI Technology Opportunities Fund
• Tata Digital India Fund
• Franklin India Technology Fund
• ICICI Prudential NASDAQ 100 Index Fund

I’m totally new to stocks & mutual fund investment. And I’m also aware that I should diversify my investment among different sectors and categories. But out of curiosity, I have a question that which is the better option? Shall I invest 5000 Rs in one MF or 1000 Rs in each one of the above? Will it cost me more if I’m opting the 1000 rs option when I’ll exit? What are the pros & cons of both methods?

[TradeXMaster]

Hi,
It’s true that divesification is important but there must be a proper reason for that.( overdiversification affects the ROI)
IT sector - If the above AMCs invest in the same underlying then there is no need to diversify. You can invest in any one of them. (you do need to check out other parameters like exit load/expense ratio etc.
(You don’t have to invest in mutual funds that invests in the same underlying).
For example, we have nifty 50. A lot of mutual funds track them but we don’t need to diversify here as the mutual funds in turn invest in the same underlying.

Yes, you can diversify across different sectors. That’s up to you.

Note - The last fund tracks NASDAQ whereas other MFs track India’s IT stocks. So, there is a difference there.

Any more questions ?

[Vivek_Parmar]

Thanks for answering. I understood your point that if any ABC & XYZ mutual funds are investing in the same companies then technically it doesn’t make much sense of creating 2 separate SIPs.

But in general, my question was, say I want to invest 5000 Rs in IT, 3000 Rs in pharma, 2000 Rs in gold then does it make any sense to further diversify our investment among different funds?

According to me:

1. My all investment will not be held in a single fund house
2. If any AMC decides to shut down the business or anything wrong happens then my risk is reduced
3. If the fund manager gets changed then I’m not 100% reliable on the new manager’s strategy

The negative part is to keep track of different funds from our end. Are there such more points?

[Stonecold]

Two are enough in the same category. Charges are just the expense ratio which is in percentage so doesn’t matter if you have two or five.
Having 5 funds of the same category will just clutter your portfolio.

[TradeXMaster]

@Stonecold

so doesn’t matter

It does matter. Not all funds have the same charges.

[TradeXMaster]

@Vivek_Parmar

The negative part is to keep track of different funds from our end. Are there such more points?

Yes and loosing money when AMC shuts down is pretty unlikely. They are well regulated, so no need to be very concerned there.
Even if they shut down, they will return your money. Also changing the fund manager etc is their problem. A well managed AMC will have a good team (with a backup) so no need to worry.

[RahulKhanna]

Ok, a lot of really stupid advice on the thread so far. Really horrible advice. Here’s how you think about it.

@Vivek_Parmar

And I’m also aware that I should diversify my investment among different sectors and categories.

Diversification doesn’t mean adding 20 different funds, that would be DIWORSIFICATION.

@Vivek_Parmar

But out of curiosity, I have a question that which is the better option?

In all the funds above, the theme is IT broadly, meaning, it’s a sectoral or a thematic bet. I am guessing you want to invest in IT because the returns have been good or you might have heard about AI/ML and all that stuff.

Anyways, the thing about investing in such a narrow sector is that, things can really volatile. Take a look at the NSE IT Index chart

The index can fall quite a bit and do nothing for a really long time. So, you need to be ready for that. Your IT funds will do nothing while a border index like Nifty 50 will be going up quite a bit.

Looking under the hood of the funds

Diversifying doesn’t mean picking 5 different IT funds. Think of it this way, Does it make sense to go to 5 different coffee shops to fill one cup of coffee? I hope you’ll answer yes.

It’s the same logic here. When you’re investing in a theme, it makes ZERO sense to buy 10 funds of the same theme. Now, the next thing you need to do is look at what you are getting. If you look at the underlying holdings of ICICI Tech, Tata, and Fraklin funds, you’ll see that a lot of the holdings are common-Infy, TCS, HCL, TCS, Tech Mahindra, Persistent are the top holdings. How does it make sense to hold 3 different funds to get exposure to the same set of stocks?

SBI is a bit different because it has a mix of Indian and US stocks. But if you choose to invest in Nasdaq 100, you’ll again get exposure to the same US stocks. So, how does it make sense?

Having said that, there’s a another factor at play here. Some people think you should also diversify across AMCs because what if some AMC messes up like Franklin, DHFL, etc? That’s a personal call you have to make.

Thinking about sectoral investments.

When you look at the Nifty IT chart you’ll be tempted to invest. I mean, who doesn’t want 5X returns compared to Nifty 50

The other interesting thing in the chart is that, unless I’ve got it wrong, the long-term returns of Nasdaq in rupee terms are much lower than the dollar returns. This will seem confusing since you’re a beginner, but in simple terms, since Nasdaq is a US fund, you’ll have to bear the currency risk.

But this line chart shows only one side of the picture. Look at the drawdowns-the % fall from a peak to bottom. Notice the blue area, Nifty IT is much riskier compared to Nifty 50 and even Nasdaq.

Hope this gives you a starting point to think about things.

[Vivek_Parmar]

Yes, you’re right!

[Vivek_Parmar]

Thanks Rahul for the detailed answer with anaysis and chart.

[TradeXMaster]

@RahulKhanna

stupid advice on the thread so far. Really horrible advice

Can you mention what ‘stupid’ and ‘horrible’ advice you found on this thread ? @RahulKhanna

I’m asking as I have participated in this thread before.

[Akash_Shah]

@RahulKhanna

The other interesting thing in the chart is that, unless I’ve got it wrong, the long-term returns of Nasdaq in rupee terms are much lower than the dollar returns.

Seems like you have got it wrong.
I am not sure what you have plotted in chart but over long term Nasdaq 100 return in INR terms are much higher than in USD.
This is mainly because rupee is depreciating against dollar and hence return in INR terms are much higher than dollar returns.

@RahulKhanna

but in simple terms, since Nasdaq is a US fund, you’ll have to bear the currency risk.

That part is true, if rupee starts appreciating, than returns would be negatively impacted. If it continues to depriciate, returns would be positively impacted.

[RahulKhanna]

@Akash_Shah

Seems like you have got it wrong.
I am not sure what you have plotted in chart but over long term Nasdaq 100 return in INR terms are much higher than in USD.

Not really and not always, that’s a common misconception Here’s Sensex in rupee terms vs Sensex in dollar terms (Dollex)

[Akash_Shah]

I am not sure what you are trying to explain to me.
As per your chart dollex has returned 250% , whereas sensex has returned 463%
So my explanation that when currency is depreciating, return in INR are higher than in USD stands true for your example too.

So what is the common misconception you are trying to explain?

[RahulKhanna]

Ah, sorry bad. I Misread the previous comment.