One well-known advice is: diversification is good but over-diversification is bad.
I have doubt about this. Consider two examples:
case-1
Sticking to the advice, someone decided to invest Rs4000 in only one large cap fund, DSPBR top100 equity. After 3 years, return is about 10% i.e., Rs400.
case-2
another person decided to diversify a bit and invested in two large cap funds 3 years back: Rs2000 each in DSPBR to100equity and HDFC top200 (it has small midcap bias, but ignore that). After 3 years, returns are 10% and 14% resp. So total return is: Rs200+Rs280=Rs480
So in second case, due to diversification, return is more. Of course if in case-1, one if one invested entirely in HDFC Top200 then return would have been maximum. Since one can not predict future and past performance of a fund is not an absolute indicator of future performance, by diversification as in case-2, the return is averaged.
However everybody would call strategy in case-2 an overdiversification. But is it really so bad? (Of course I do not mean blind overdiversification but overdiversification in carefully chosen select funds)
I have doubt about this. Consider two examples:
case-1
Sticking to the advice, someone decided to invest Rs4000 in only one large cap fund, DSPBR top100 equity. After 3 years, return is about 10% i.e., Rs400.
case-2
another person decided to diversify a bit and invested in two large cap funds 3 years back: Rs2000 each in DSPBR to100equity and HDFC top200 (it has small midcap bias, but ignore that). After 3 years, returns are 10% and 14% resp. So total return is: Rs200+Rs280=Rs480
So in second case, due to diversification, return is more. Of course if in case-1, one if one invested entirely in HDFC Top200 then return would have been maximum. Since one can not predict future and past performance of a fund is not an absolute indicator of future performance, by diversification as in case-2, the return is averaged.
However everybody would call strategy in case-2 an overdiversification. But is it really so bad? (Of course I do not mean blind overdiversification but overdiversification in carefully chosen select funds)
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