Too many SIPs? Here’s how to know if adding another mutual fund makes sense

Many investors assume that owning more funds automatically means better diversification and lower risk. In reality, that’s not always the case.

While more funds may seem like a smart way to diversify, they can also lead to portfolio overlap, the same underlying stocks, and over-diversification of your portfolio, which may ultimately lead to poor returns.

So, before starting another SIP, it’s worth understanding whether your current investments already provide the diversification you need or if a new fund genuinely adds value.

Here’s how to determine if your next mutual fund investment is a smart addition or an unnecessary decision. 

How many SIPs should you have?

Investors should understand that there is no standard number of SIPs or mutual funds that every investor should hold. 

It can vary based on factors like their investment corpus. Instead of focusing on the number of funds, investors should aim to build a well-diversified portfolio by diversifying across the categories and AMCs to avoid the underlying portfolio overlap.

“For instance, an investor investing 10 to 15k in SIPs can invest across 4 to 6 funds, which would be ideal. On the other hand, investors investing more than 40 to 50k in SIPs can consider investing in 8 to 10 funds across diversified equity categories and different AMCs. Additionally, one should aim to build a portfolio with a market cap allocation of 55:25:20 across large, mid, and small caps,” commented Adil Chacko, Executive Director at Anand Rathi Wealth. 

Is your portfolio over-diversified?

Diversification can often turn into over-diversification when one starts investing in funds that don’t add meaningful exposure to the portfolio. 

If multiple funds own largely the same stocks or follow similar strategies, investors may end up with underlying portfolio overlap, which also increases concentration risk.

For instance, if one holds more than 3 or 4 funds within the same MF category, a major portion of the underlying portfolio will be concentrated in the same set of companies, which creates an optical diversification rather than identical diversification, as the investor owns more schemes but not necessarily a broader set of underlying investments. Instead of reducing risk, such duplication can increase concentration risk and dilute returns.

“Consider an investor investing Rs 50k in an SIP. Initially, the investor started the SIP across 5 diversified funds with distinct investment mandates that have a portfolio overlap of 20–25%. Later, the investor added 5 more funds, including similar diversified funds and NFOs, without assessing their underlying portfolios,” said Adil Chacko. 

“Although the number of funds increases from 5 to 10, the portfolio overlap rises to nearly 60%, with most funds holding the same large-cap stocks such as HDFC Bank, Reliance Industries, and ICICI Bank. Instead of improving diversification, the investor ends up with similar exposure, making the portfolio more concentrated towards similar underlying investments,” he further explained. 

This highlights that adding another SIP should be based on whether it fills a genuine gap in the portfolio, not simply on increasing the number of mutual funds.

Moreover, investors often tend to invest in every NFO without evaluating its underlying portfolio and investment mandate, assuming that adding more schemes will improve returns, but in most cases, it results in duplication rather than diversification. 

Instead of increasing the number of funds, one can aim to periodically review their portfolio to ensure that their investments are aligned with their objective, risk profile, and overall asset allocation.

How to structure your portfolio? 

Investors should avoid taking any investment/portfolio decisions based on market phases, such as whether they are in a bull or bear phase. 

Moreover, investors often make the mistake of chasing sectors or themes that have recently outperformed during bull markets or panic-selling quality investments during market corrections.

Instead, one should aim to build a strategy based structure portfolio that aligns with their investment goals, tenure, and risk profile. 

One can build a well-structured portfolio by diversifying across asset classes like equity & debt, in equity, further diversifying across diversified equity categories such as market cap-based funds, strategy-based funds like focused, value, and dividend yield. 

This broad diversification helps to get exposure across market caps, segments, and sectors, and reduces concentration risk & helps to ride across different market phases and cycles.

Too many mutual funds? Watch these signs

One of the most common signs of owning too many mutual funds is when investors are unable to clearly define the purpose of each scheme in their portfolio. 

For instance, if multiple funds in the portfolio belong to the same category, have similar underlying holdings, or follow nearly identical investment strategies, it indicates unnecessary portfolio overlap rather than meaningful diversification.

“Other signs include investing in every NFO or trending investment theme without evaluating the underlying portfolio or investment strategy to understand whether it adds meaningful diversification or not, and often this will increase portfolio overlap and result in duplication of underlying holdings without adding any meaningful value or improving the portfolio’s risk-return profile,” said Adil Chacko. 

Key portfolio metrics every SIP investor should check

Before starting a SIP in a new fund, investors can consider evaluating whether the new fund adds any diversification to their existing portfolio. 

Additionally, one should also consider reviewing the metrics such as exposure across market caps, investment style, sector concentration, and the extent of portfolio overlap with existing funds.

Moreover, if the existing funds in the portfolio already provide adequate diversification, starting another SIP in a similar fund may not add value. Instead, investors can consider increasing SIPs in their existing funds or allocating to maintain a balanced portfolio.

How much mutual fund overlap is too much?

Investors should understand that there is no fixed level of portfolio overlap between two mutual funds. 

However, broadly, one can consider an overlap of up to 20 to 30% between the funds in the portfolio to be optimal when the funds have different investment mandates and objectives. 

Moreover, if the overlap between the funds is more than 40 to 50%, one can consider reviewing whether both funds are truly adding diversification or just duplicating exposure to the same underlying holdings.

“Investors should ensure that each fund in the portfolio serves a distinct purpose, and one should aim to build exposure across market caps, investment styles, and sectors, instead of owning multiple funds that invest largely in similar underlying investments,” recommended Adil Chacko. 

More funds, better returns? Think again

Investors should understand that just adding more funds to the portfolio doesn’t automatically diversify the portfolio or enhance portfolio performance, and it often creates overlap between the funds & increases concentration risk in the portfolio. 

The ideal approach for investors to add a new fund is to define the purpose of investment, whether it adds any new value to the portfolio that existing funds are missing, which helps to find the purpose of the investment.

Instead of investing in a larger number of funds, one can consider building a strategy-based portfolio by diversifying across the active diversified equity fund categories and AMCs to reduce concentration risk and get exposure across the segments, sectors, and market caps, which helps to ride across the market cycles.

Disclaimer: This article is for informational purposes only and should not be construed as investment advice. Mutual fund investments are subject to market risks. Please read all scheme-related documents carefully before investing.

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