I have some mutual funds some large/mid/small/flexi/momentum.. and i will continue same sips monthly.
if we do monthly 10,000 into one small cap or 10,000 into two different small caps 5000 each
Example: 1. Bandhan 2. Nippon
what would be the difference? Can someone elaborate pros or cons on this scenario?
if we do monthly 10,000 into one small cap or 10,000 into two different small caps 5000 each
what would be the difference? Are we loose compounding phenomenon? Can someone elaborate pros or cons on this scenario?
If the two funds match the same index then over time there will be very little difference in final balance. Each fund does have a slightly different tracking error, and expense ratio, so you should research these values when deciding to pick between the funds.
Note: stock funds don't compound: their price may go up or down; they may payout dividends and capital gains; but there is no expected compounding.
Given that point, if the funds are similar then two funds vs one fund won't change the end result. If both grow 10% this year, it doesn't matter if your investment in one was larger than the other
but if you split them:
Why pick two similar funds? some people don't want all their investments in one brokerage company. Others do want all their funds in one place. One of the diversification options is to split your funds into different fund families.
Unless you're talking about index funds, mutual funds with similar objectives will not necessarily own the same securities in the same proportions. Fund managers employ different strategies, and may make different judgements about whether specific companies are good investments.
So splitting your money across 2-3 funds with similar objectives provides some diversification, and therefore some risk reduction -- if one fund makes a bad investment, it's unlikely to be duplicated in the other.
But like all diversification, it also tends to smooth out all results. Protecting against the consequences of bad decisions also means you don't get the full benefit of good decisions.
That said, fund managers are generally basing their decisions on the same raw data about the securities they invest in. Blue-chip stock funds will likely be very similar, since there aren't that many different companies in the category, and their fundamentals are well understood. On the other hand, there are many small cap stocks, and it's hard to research all of them, so small cap funds will tend to be more varied in their portfolios; investing in multiple funds may allow you to get a wider cross section of the market.
There are services like Morningstar that can compare mutual funds, telling you how similar their portfolios are. That way you can avoid investing in funds that are too similar, since there's little diversification benefit.
