Trying to understand why investing in funds with common holdings is considered a bad idea.

[rosedude]

I'm a newbie and I'm trying to understand the logic of , why buying similar funds is bad.

let's say you have to decide top 5 cricket teams in the world, you can choose one team 5 times or multiple teams to fill these 5 spots. The total list of teams contains-

All international teams & All IPL teams & World X|

What are the chances, you are not taking one team 5 times?

How is it different from common holdings that different Funds have.

Let's assume four funds A,B,C,D , where A & B have many common holdings and C & D have many common holdings but A & D have no common holdings.

Why is investing 50% each in A & D considered better than investing 25% each in A, B, C & D.

Is there any reason other than the expense ratio?

 

[solarkat]

@rosedude

1. Because If common holdings is there then there is hardly any impactful gain with choosing another fund, in that too your paying expense fee with little to or no gain.
2. Non common holdings gives exposure to diff companies hence your fund performance won't be identical and fund is investing in multiple companies.
3. If you want to cover 4 funds with 25% each and fund type is Bluechip or say Largecap only then Rather than paying e.g 1% expenses fee for each I would be more than happy to choose single Index fund.

 

[cantplayalick]

@rosedude Suppose you have to choose top 3 cricket teams and depending on their individual player performances all over the year you'll earn points. You chose India, South Africa and RCB.

Now your points are going to depend twice as much on Virat Kohli and AB Devilliers. If they do well, you're lucky but if they don't you'll suffer from that twice.

So it would have been a better idea to choose India, South Africa and Australia. No commonalities would mean you're hedged well.