Investment planning is a lot like maintaining a garden. You have to keep a close eye on all the different plants growing; prune where necessary, nurture the weaklings, and encourage the strong ones to grow.
Investment planning is quite similar to this. You cannot simply create a portfolio of randomly selected securities and then forget about it. The securities in a portfolio must be selected after careful examination of your financial goals, risk appetite, and investment horizon. More importantly, an investment portfolio must be created in a way that it yields optimum returns for you.
Portfolio diversification is a crucial tool which is used in the process of investing in different asset classes in order to reduce the overall investment risk. Portfolio diversification prevents damage to the portfolio due to the poor performance of a single investment. You may diversify your portfolio by distributing your funds in different proportions, among assets like fixed-income securities, equity shares, Equity-Linked Savings Schemes (ELSS), gold, and other instruments.
ELSS today is one of the best investment products to be included in your portfolio. ELSS funds are all-rounders—they are tax-saving investments that offer flexibility, professional management, and a potential to earn high returns. Naturally, an increasing number of people invest in ELSS. In fact, you may choose to buy multiple ELSS funds. However, does this kind of diversification help or hurt your portfolio?
The myths surrounding diversification
The most common saying used in relation to diversification is “Don’t put all your eggs in one basket” and it is right! It is important to spread investments across different asset classes. For example, you may allot funds to fixed deposits, Public Provident Fund (PPF), ELSS, equity stocks, and debentures, in different ratios. However, when you buy ELSS funds, the asset class for each plan is common i.e. equity. Therefore, investing in multiple schemes is similar to buying more of the same asset; and this is not diversification.
The pitfalls of over-diversification
You may buy ELSS online or offline from a wide variety of mutual fund houses. ELSS funds invest in equity securities of large-cap, mid-cap, small-cap companies, or even a combination of different categories. When you buy ELSS funds, you are indirectly investing in the underlying asset, equities, and related products.
You may choose to invest in the large-cap ELSS fund offered by a particular asset management company (AMC).You may also invest in a multi-cap ELSS fund of another AMC. This allows you to diversify some of the risks associated with your portfolio. The underlying asset for all ELSS funds is the same and therefore, investing in one or two schemes that invest in different categories is advisable. However, putting money in multiple ELSS funds that have a similar selection of equity investments is futile.
Complicated investment tracking
Imagine a scenario in which you buy ELSS funds of five different AMCs at different points in time. Tracking the performance of multiple ELSS investments bought at different times is a time-consuming and tedious process. It is a lot more convenient to invest in one or two funds and regularly track and monitor their performance.
Tax benefits remain the same
ELSS is one of the most sought after tax-saving investments in the market. Investment in these funds is exempt from taxation under section 80C of the Income Tax Act for up to ₹ 1.5 lakh. Moreover, the dividends and the maturity value are also exempt from taxation and this benefit acts as an excellent incentive to invest in such schemes.
However, to save taxes, you may buy new ELSS plans each year or in the same year. Investment in multiple schemes does not mean greater tax savings as the exemption limit is capped at ₹ 1.5 lakh. Instead of putting money in different ELSS funds, you may invest in the same fund through a Systematic Investment Plan (SIP).
The simplest things in life are the best and we believe this applies to investment decisions as well. Why complicate your personal finances with an over-diversified portfolio? Instead, strike a balance between risk and returns by limiting your ELSS investments to fewer schemes.
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