The age of being average

One of the reasons for investing in Mutual funds is that since you are investing in a diversified fund with a manager who understands market, your returns will be better than what you can achieve on your own (since we fall prey to various Behavioral biases). But once you have decided to invest in Mutual fund, the next key question is, invest in what fund.

Big money is made when you bet big and it works as one expected or more. But when it comes to funds, Advisors want to play it safe. Rather than invest big into 1 or 2 funds, they recommend buying all types of funds with the hope that the average will make the whole play better.

Buying 15 / 20 / even more funds will ensure that you don’t suffer high level of volatility but on the other hand, do not expect your portfolio to beat the market in any big way. But with so many funds, are you really generating real Alpha?

The reason for advisers to advise investing in so many funds is that even they are clueless about both selection of funds as well as what the market has for the future. So, by lumping Large  Mid and Small cap oriented funds, they hope that regardless of what is the flavor of the market, they remain secure in the knowledge that at least some part of the fund is invested and hence has not missed the momentum.

Playing it safe is not a bad idea, but if you are looking at safety in numbers, why not just stick to simple Index ETF’s. At the very least, you can be sure that you will not under-perform the markets. By buying too many funds with a lot of overlap in portfolio’s, all you are ensuing is that you get the same return without the advantages of liquidity that come with ETF’s.