Is it important to include so many investment avenues?

The quality of your questions determines………….
February 18, 2023
Pain of Payment
February 19, 2023

One of my clients is always very keen to include all the possible investments with the hope that this will make her portfolio well diversified.

She insists on investing in Endowment policies, ULIPs, Pension plans, PMS, fixed deposits, mutual funds and in direct stocks.

But does investing in all these investments provide sufficient diversification? The answer is emphatic no. This reckless accumulation of investment avenues only increases the cost, complexity and complications. ULIPs, PMS and mutual funds invest in the same investment universe, so including all provides very little diversification. ULIPs and PMS have a higher expense ratio, longer lock-in period, and less transparency than mutual funds, so investing in them just for the perceived (yet incorrect) notion of diversification is not the smartest move.

See, the investment avenues are clearly divided into-

  • Equity investments

  • Fixed market investments &

  • Investments in Assets like gold, silver, real estate etc.

So, the diversification should be done to include the meaningful representation of these broad categories. For example, if you want to diversify in equity investments, the good diversification is to include large cap funds, multi cap funds, mid cap funds, small cap funds and international funds. On the other hand, taking ULIP plans with the hope that they will complement the mutual fund portfolio and make it more diversified is an example of not so smart diversification.

In almost all cases, you can diversify your portfolio efficiently by investing in mutual funds only. Insurance plans are best to cover the insurance only. Mixing insurance with investment is a high cost and long-term lock in proposition, which is best to be avoided. Similarly, PMS are also high-cost plans with a lot of opaqueness and higher tax incidents, thus they are also not worth your salt either.

Manoj Pandey