One Rs 10,000 SIP or five of Rs 2,000: what the numbers say about spreading your money

A question often faces new and old mutual fund investors alike: should the full amount be put into a single fund, or split across systematic investment plans (SIPs) in different funds? This is especially so when Rs 10,000 is to be invested every month. There is considerable confusion over whether one SIP of Rs 10,000 is better or five separate SIPs of Rs 2,000. To clear it up, it is important to understand the arithmetic and the rules of diversification.

On simple arithmetic, if all funds earn an equal 12 per cent annual return, the total wealth built over the long term is almost the same. Take 20 years as an example.

Investing Rs 10,000 a month for 20 years means a total investment of Rs 24 lakh. At an assumed 12 per cent return, this earns a gain of about Rs 75,91,479. The total in hand at maturity comes to Rs 99,91,479.

Now take a single SIP of Rs 2,000 a month. Over 20 years, the principal is Rs 4,80,000. A gain of Rs 15,18,296 on it makes a total of Rs 19,98,296. Investing Rs 2,000 each in five separate places adds up to the same total.

On paper the arithmetic looks equal, but in the real market all funds do not give the same return. If you put all your money in one fund and its performance starts to suffer, the entire investment can take a hit. Choosing different funds spreads the risk to some extent.

Even so, starting five SIPs does not automatically bring diversification to a portfolio. If you pick five funds from the same category, such as five large-cap funds, their portfolios overlap. The reason is that India has only a limited number of large stocks to invest in. One analysis found that, for small-cap funds, a five-fund portfolio beat a two-fund portfolio by only a very slim margin, just 0.3 per cent. This means adding unnecessary funds brings little benefit, and it makes it harder to keep a close watch on all of them.

There is no strict rule on how many funds there should be. But according to financial experts, if your monthly investment is between Rs 5,000 and Rs 15,000, it is fine to pick two to three good funds.

Five separate SIPs can be beneficial only when each fund has a distinctly different purpose. The strategy for a balanced portfolio should differ: for example, equity for growth, and hybrid, debt, gold or international funds for safety or diversification. Real diversification comes not from increasing the number of funds but from choosing the right asset classes and categories. The decision should therefore be made only after identifying your risk appetite, investment goal and time horizon.

This information is for educational and informational purposes only. Mutual fund investments are subject to market risks. Before making any investment, consider your financial goals and, if needed, take advice from a SEBI-registered financial adviser.