Is It Safe To Invest Via SIP?

Is It Safe To Invest Via SIP?

From its inception in 1963 till now – mutual funds in India have come a long way. But one thing has remained constant. And that is the apprehension of investors regarding how safe their money is in these mutual funds. Some people go one step further and wonder whether investing via SIP carries more risk. Let’s debunk all myths about this today. What Is an SIP Let’s give you an analogy. You buy an AC worth Rs.40,000. Instead of paying the amount upfront, you pay in instalments. Why? The payment becomes manageable. You don’t feel the pinch when you pay …

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Are Your Mutual Funds Overlapping?

Are Your Mutual Funds Overlapping?

Investors use mutual funds to avoid putting all eggs in the same basket. When you invest in a mutual fund, you effectively invest in multiple stocks on a fractional basis. This diversification helps you stay relatively safe from market volatility.

The problem arises when you invest in multiple mutual funds having the same underlying stocks. This is what we call overlapping mutual funds. There are numerous downsides to this overlap. Let’s understand this in a more detailed way.

Mutual Fund Overlap: Here’s a Simple Scenario

Imagine you have invested in two mutual funds – UTI Large Cap fund and SBI Bluechip fund. You thought that since the names of the funds are different, the underlying stocks will be different as well. But that is not the case.

These two funds have a lot of overlapping underlying stocks –

As you can see, the portfolios of these funds are made up of stocks that are common in both.

The Problem With Overlapping Mutual Funds: Less Diversification, More

Volatility

Investing in mutual funds with overlapping underlying stocks makes your entire portfolio susceptible to market volatility.

  • If your mutual fund portfolio has too much overlapping of underlying securities, it means that you have more exposure to those overlapping securities. Hence, if the price of any of these overlapping securities falls sharply, it will have a more pronounced negative impact on your overall portfolio. In a nutshell, you will not be getting the benefit of diversification if you invest in overlapping mutual funds.
  • Another problem with investing in overlapping mutual funds is the fact that it makes your overall investment journey expensive. How? Suppose you invested in mutual funds A and B, which have a significant number of overlapping securities underneath. Both of these funds charge you in the form of an expense ratio. This means that you are paying two funds to manage the same set of stocks. Imagine if there was no overlap in these mutual funds. In that case, you would have been paying two funds to manage two different sets of stocks, which is more logical.

There are many free tools available on the internet that help you see if the mutual funds you have invested in have overlapping securities. These tools will help you understand the percentage of the overlap between two mutual funds schemes.

Why Overlap Happens and How To Avoid Portfolio Overlap?

There are several reasons why portfolio overlap happens:

  • Portfolio overlap can be prominently seen when the investment universe is small like in the case for large cap funds. There is a finite amount of large cap stocks (top 100) that these funds can invest in as per SEBI mandate. As a result, different largecap funds have the high likelihood of investing in the same underlying stocks.
  • Secondly, funds with the same investment theme can have portfolio overlap. Why? Because the theme or sector is the same and there are only a limited number of stocks there. For example, technology funds have to predominantly invest in technology and IT stocks. So different technology funds have to choose from the same universe of IT stocks.
  • Lastly, different funds from the same AMC can have portfolio overlap because the investment philosophy of the AMC. An AMC can have a broad investment philosophy that they apply to all of their funds. Hence, even different categories of funds can have overlapping stocks.

 

So, how to avoid mutual fund overlap?

Invest in mutual funds across different categories. For example, both LIC MF large-cap fund and Edelweiss Large-cap fund invest in large-cap stocks. These two funds are in the same category. As a result, they have a whopping 68% portfolio overlap.

Let’s go back to the example of UTI Large Cap fund and SBI Blue-chip fund. The category of these funds is the same (and as we said, Large cap funds have a mandate to invest in the top 100 stocks only as per market capitalisation). As a result, these funds have a huge overlap.

 

To avoid this, invest in funds from differing categories.

Interestingly, many AMCs have their own investment philosophies that they stick to. Thus, when you invest in seemingly different funds from the same AMC, there is a possibility of portfolio overlap.

Here’s an example. UTI Large Cap funds and UTI Flexi Cap funds are funds under two different categories. But since the funds are run by the same AMC having the same investment philosophy, a sizeable percentage of overlap can be observed.

 

  • So, make sure you invest in funds from different AMCs – don’t stick to just one.
  • Lastly, review your mutual fund portfolio periodically. This is specifically true in the case of flexicap and multicap funds and other actively managed funds. The holdings of these funds change frequently. This change in holding might gradually create an overlap between two such funds.

How Much Is Too Much Overlap in Mutual Funds?

Usually, you can’t avoid portfolio overlap to a certain extent. It’s likely that there will be some common underlying stocks in mutual funds that you have invested in. You just have to make sure that the overlap is not too much. But how much is too much? There is no standard rule in this regard, but it’s advisable not to have more than 30% to 35% overlap.

In the end…

Diversification smoothens the bumpy road of investment. And one of the primary objectives of investing in mutual funds is to achieve this diversification. It keeps your investments safe from volatility. You don’t have to care if one or two stocks go down. But when these one or two stocks grab the lion’s share of your overall mutual fund portfolio, that’s when the problem begins. In such a scenario, the price movement of these few stocks affects the stability of your entire portfolio. Always make sure that your overall portfolio does not have too much overlap. The journey of wealth-making is a long one. You don’t want a bumpy road.

 

-Nischay Avichal

 

 

 

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Exploring Restoration Benefits in Health Insurance

Exploring Restoration Benefits in Health Insurance

Without a doubt, health insurance is the shield that can help you meet unexpected and large medical emergencies. In the absence of a comprehensive health cover, you would have to rely on your savings or even worse –high interest personal loans. Using your savings means sacrificing your other essential goals– your daughter’s education, your retirement or the dream house you were panning for. Hence, buying a health insurance is crucial for your financial health. But buying a policy is also a tough task– a lot of insurers to shift through and lot of features to get your head around. In …

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TDS on Property Purchase: What You Need to Know Before Buying one

TDS on Property Buying: What You Need to Know Before Buying one

Are you gearing up to buy a property? Exciting times ahead! Do you know that buying a property also means paying TDS to the Government depending upon the value and type of property? In this blog, we dive into what you need to know about TDS when it comes to buying a property. Why Do You Need to Pay TDS Upon Buying a Property? The purpose of TDS collection by the Government is to collect the tax when the income is generated and avoid tax evasion. It’s required to be deposited by the person making the payment. So, if you …

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How Much Money Do I Need to Save for Retirement? – A Guide

“How much money do I need to retire in India” – as we grow older, this thought appears in our mind every now and then. Retirement planning is the process that involves calculating the retirement corpus and building a strategy to achieve it. Estimating the retirement corpus accurately is important to ensure that you do not outlive your savings and save the appropriate amount. Your retirement corpus should help you meet your estimated inflation-adjusted expenses after retirement. Retirement corpus is the money you need to live a retired life without compromising on your standard of living. Why Retirement Planning is …

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Understanding Beneficial Nominee in Life Insurance

Understanding Beneficial Nominee in Life Insurance

Life insurance is a critical financial tool that offers protection and security to your loved ones in times of need. The payout from the insurer can help your family meet their essential expenses, critical goals like education, payoff liabilities, etc. Hence, having proper coverage is essential to build a solid financial foundation for yourself. If you are unsure of the amount of term cover you should buy for yourself, you can check this calculator here. Term insurance is the best way to go about life insurance due to its simple nature and low-cost structure. It is best to avoid mixing …

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Navigating Your Finances: DIY vs. Financial Advisor

Navigating Your Finances: DIY vs. Financial Advisor

Embarking on an exciting yet often intimidating journey of investing can feel like stepping into a web of possibilities. Whether you’re planning to invest 5,000 to 10,000 rupees per month or put your existing portfolio on a strategic path, the crucial decision between navigating this journey alone or taking the aid of a seasoned financial advisor looms large. In this blog, we delve into this decision-making process, aiming to equip you with the clarity necessary to plan a course aligned with your unique financial aspirations. While the allure of self-directed investing may hold a certain appeal, we shed light on …

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The Power of Goal-Based Investing

The Power of Goal-Based Investing

Imagine sailing a boat without a destination in mind or a compass. Would you feel lost or unsure of where to turn or when to stop? Without a guide and proper direction, you would eventually end up nowhere, sailing endlessly for days. Your financial journey is not very different. Your financial journey benefits from having a clear destination which is where goal-based investing comes into play. In this blog we will discuss how goal-based investing can help you in various ways. Goals are tied to your personal circumstances and lifestyle. Defining goals can help you outline what you aspire for …

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Saving Money, Building Dreams: Practical Tips for Setting Financial Goals For a Prosperous Future

Saving Money, Building Dreams: Practical Tips for Setting Financial Goals For a Prosperous Future

In the bustling city of Kolkata, where life moved at a frenetic pace, there lived a young couple, Rahul and Priya. Both were ambitious professionals with dreams of a secure and prosperous future. However, despite their promising careers, they found themselves struggling to make ends meet at the end of each month. They found the paycheck disappearing faster than anticipated, leaving little room for savings or investment. It was a classic tale of living for the moment without having set any financial goals or even considering the future consequences. One day, as they were sipping chai at a local gumti, …

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Financial Planning Tips For a Truly Prosperous 2024

Financial Planning Tips For a Truly Prosperous 2024

It’s 2024! It seems like we have seen everything – from the pandemic to inflation and recession. From a financial point of view, the journey seems like a roller coaster ride. So, how should you approach 2024 in terms of financial planning so that it doesn’t feel like another bumpy ride? You can follow some financial management best practices to make your financial life in 2024 smoother – with minimal hiccups. In this blog post, let’s talk about six financial planning tips for 2024 that would make the new year a watershed year for your financial well-being. But before we …

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