More Choices, Less Clarity
It starts from a sensible idea.
Diversification is one of the fundamental principles of investing. Spreading money across different investments can reduce the impact of any single investment performing poorly.
The logic is sound.
The problem begins when investors interpret diversification as “the more funds I own, the more diversified I must be.”
That is not necessarily true.
Owning more funds can sometimes create the appearance of diversification without significantly changing the risks of the overall portfolio.
Why More Funds May Not Mean More Diversification
India’s passive investment universe has expanded considerably. Investors can now choose from index funds covering different market capitalisations, sectors, themes, factors, and asset classes.
That variety can be useful.
But variety and diversification are not the same thing.
Several equity indices can contain many of the same companies, even though they have different names and methodologies.
For example, the Nifty 50, Nifty Next 50, and Nifty 500 have different compositions, but there can be meaningful overlap across their underlying companies.
An investor holding all three might feel that they own three completely different investments.
However, the portfolio may still have substantial exposure to the same broad segment of the Indian equity market.
The result can be:
More funds → more statements → more holdings → more things to monitor
without necessarily creating a proportionate increase in diversification.
The Complexity Bias
Another behavioural tendency can make this problem worse: complexity bias.
It is the tendency to assume that a more complicated system must be more sophisticated.
In investing, this can appear as the belief that a portfolio containing eight or ten funds represents more careful planning than one containing two or three well-chosen funds.
But the number of funds does not determine the quality of a portfolio.
What matters is what each investment contributes.
Consider two hypothetical portfolios.
Portfolio A:
- Broad equity index fund
- Debt fund
Portfolio B:
- Large-cap index fund
- Another large-cap index fund
- Nifty 50 fund
- Nifty Next 50 fund
- Sector fund
- Thematic fund
Portfolio B contains more funds, but that does not automatically make it more diversified.
If several investments respond to market conditions in similar ways, their presence may add complexity without providing much additional diversification.
Meanwhile, two investments that behave differently—such as equity and debt—may provide more meaningful diversification despite having fewer line items.
The Test for Every New Fund
Before adding another passive fund to your portfolio, ask one simple question:
“What does this fund provide that my existing investments do not?”
If the answer is:
“It contains a slightly different selection of large-cap companies.”
or:
“Someone recommended it and its recent performance looked interesting.”
then the fund may be adding another layer of complexity rather than addressing a specific portfolio need.
But if the answer is:
“It gives me exposure to an asset class that my portfolio currently does not have.”
then the investment may have a clearer purpose.
For example, an investor may deliberately want exposure to different asset classes such as debt, gold, or international equities, depending on their goals, risk tolerance, and overall asset allocation.
The key is understanding why the investment is there.
Why Passive Investing Can Benefit From Simplicity
A passive portfolio does not necessarily need many moving parts.
An investor might use a broad equity index for equity exposure, a suitable debt investment for the fixed-income component, and potentially a modest allocation to another asset class for diversification.
The appropriate combination depends on the individual’s financial goals, time horizon, risk tolerance, and circumstances.
The important principle is that each investment should have a clearly defined role.
Passive investing is based on rules, transparency, and consistency. Continuously adding funds simply to make the portfolio appear more sophisticated works against that simplicity.
More holdings do not automatically mean better diversification.
What Can You Do Instead?
Review what you already own.
For every fund in your portfolio, ask:
- What purpose does this fund serve?
- What asset class or exposure does it provide?
- How is it different from my existing investments?
- Does it meaningfully change the risk or diversification of my portfolio?
- Would I still want to own it if I ignored its recent performance?
If you cannot clearly explain why a particular fund belongs in your portfolio, that is a reason to review its role—not necessarily an automatic reason to sell it.
Simplicity Is a Feature
A portfolio does not become sophisticated simply because it contains more funds.
Diversification is about owning investments that provide meaningfully different exposures—not simply increasing the number of investment names.
A portfolio you understand is easier to monitor, easier to review, and potentially easier to stay committed to during difficult markets.Simplicity is not a shortcut. For a passive investor, it can be the objective.
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