Quite often I come across portfolios laden with too many funds. The common investor’s psychology and the reason they provide is that they are trying to achieve DIVERSIFICATION. So let’s try to understand this concept through a simple village story today.
Once upon a time in a small village, there lived a wise old farmer named Suresh. Suresh had a large farm where he grew a variety of crops, raised chickens, and tended to a small orchard. Every year, he would tell the village children the same story as they gathered around him during the harvest season.
“Children,” Suresh would begin, “have you ever heard the saying, ‘Don’t put all your eggs in one basket’?” The children would nod eagerly, for it was a lesson they all knew well. “It’s a simple idea, isn’t it? If you put all your eggs in one basket and the basket falls, you lose everything. But if you spread your eggs across different baskets, even if one falls, you’ll still have some eggs left.”
The children understood this easily. It made sense. Then one day, a curious boy named Arjun asked, “But Grandpa Suresh, if spreading eggs across baskets is good, wouldn’t it be better to use more and more baskets? What if we use 10 baskets or even 50?”
Suresh chuckled and patted Arjun on the head. “Ah, Arjun, you’re thinking like a smart investor now! But let me tell you another story to explain why that might not be the best idea.”
He took a deep breath and began. “Imagine you have ten baskets, and you carefully place your eggs in each one. But what if you had so many baskets that you could only put one egg in each? Imagine having 50 or 100 baskets! It would be hard to keep track of all those baskets, wouldn’t it? You might forget where you placed some eggs, and in the end, the eggs wouldn’t be safe at all.”
Arjun frowned, trying to understand.
Suresh continued, “Now, think of these baskets as mutual funds. When you invest your money, spreading it across a few funds is like spreading your eggs across a few baskets. It’s smart and helps protect you if one investment doesn’t do well. But if you invest in too many funds, it becomes hard to manage. You won’t be able to keep track of what each fund is doing, and you might end up with many funds that are all holding the same types of stocks.”
The children leaned in closer, eager to learn more.
Suresh smiled at them. “The truth is, mutual funds are already diversified. Each fund is like a basket holding eggs from many different hens—stocks from many different companies. If you have too many funds, it’s like having too many baskets that are all the same. Instead of protecting your money, you’ll just create more work for yourself, and you won’t gain much in return.”
Arjun’s eyes lit up as he began to understand. “So, Grandpa Suresh, it’s better to have just a few baskets with enough eggs in each, right?”
“Exactly!” Suresh exclaimed. “For most people, having three or four well-chosen mutual funds is just the right number. Any more, and you’re just making things harder for yourself without getting any real benefit. Remember, the goal of diversification is to protect your money, not to make things more complicated. Keep it simple, and you’ll be able to watch over your investments carefully and make sure they’re growing well.”
The children all nodded, feeling wiser from the story. They knew that whether it was eggs in a basket or money in mutual funds, it was important to find the right balance. And with that, they ran off to play, leaving Suresh with a satisfied smile, knowing he had planted another seed of wisdom in their young minds.
With this short story I hope I was able to convey my ideas well. If yes, please share your comments on my page. Or in case you feel I should write on some specific topics please do so.
Simplified Money Talks 