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How many mutual funds should you hold?

How many mutual funds should you hold?

Today, mutual funds are one of the most popular investment avenues for Indian investors. They offer diversification, professional fund management, liquidity, and access to different asset classes. 

If you’re into mutual fund investments, you must have heard investment experts advising on maintaining a diversified mutual fund portfolio. Diversification helps to protect you from sudden risks. However, in the attempt to diversify, investors often hold too many funds without realizing that it is not improving their returns but instead harming them. 

Holding excessive mutual funds can result in overlap, confusion, and unnecessary effort in portfolio tracking. It is vital to understand what an ideal mutual fund portfolio is based on your financial goals, risk tolerance, and investment horizon. 

Why do you invest in too many mutual funds?

The most common reasons why you accumulate too many mutual funds in your portfolio are:

Over-diversification

Diversification helps to spread risk. However, if you allocate money to multiple funds, your returns won’t be that great even if one of them does very well. You must learn how to diversify a mutual fund portfolio before taking action. Adding funds beyond a certain point does not reduce risk. It creates complexity without adding meaningful diversification. 

Recommendations from various sources

It is common for investors to make investments based on the suggestions of family, friends, colleagues, and even distributors. If you follow this approach, you can end up adding funds without reviewing your existing portfolio. 

Following market trends

When a specific category, such as small-cap or sectoral funds, performs well, you may add new funds to chase recent returns, which can result in overlap and unnecessary risk.

Lack of periodic review

If you don’t review your portfolio periodically, old Systematic Investment Plans (SIPs) and lump-sum investments continue running even when goals change or new funds are added. This results in a cluttered portfolio. 

Also, read – Why having a wealth manager makes sense for everyone?

Why shouldn’t you invest in too many mutual funds?

While there is no defined maximum investment limit in mutual funds in India, there are reasons why it should not be too much. 

Lack of clarity and control

It is difficult to manage, review, and track multiple funds. You may lose sight of which funds are performing well, how each aligns with goals, or whether optimal asset allocation is achieved.

Portfolio overlap

Equity funds often invest in the same popular stocks. Holding too many funds increases duplication. Moreover, if you don’t compare mutual fund overlap efficiently, it can undermine the benefits of diversification and increase risk.

Higher costs

Although mutual funds are relatively low-cost, expense ratios still apply. If you hold several actively managed funds, your overall cost structure may be higher than required.

Complicated rebalancing

Rebalancing is crucial for maintaining your risk level. With too many funds, adjusting your portfolio becomes unnecessarily complex and time-consuming. 

Also, read – Fair market value – Meaning and how to calculate it

What is the ideal number of mutual funds that you may hold?

There isn’t a universal number that fits every investor, but one principle is almost always true: a compact, well-constructed portfolio works far better than a scattered one. Holding too many funds often leads to unnecessary overlap, diluted returns, and a portfolio that becomes difficult to monitor. Even if some funds perform well, the impact may barely show because your investments are spread too thin.

Many experienced investors eventually streamline their portfolios once they realise that clarity and purpose matter more than quantity. A mix of diversified equity funds, exposure to different investment style, and a tactical allocation to thematic or global markets can offer broad diversification without clutter. One can also add some allocation to commodities like gold or silver, to hedge the portfolio and debt to keep the portfolio stable.

What really matters is that each fund in your portfolio serves a distinct role. If two funds follow similar strategies or invest in the same part of the market, keeping both doesn’t improve diversification. True diversification comes from choosing funds that complement each other, not repeat each other.

Conclusion

The ideal number of mutual funds for you ultimately depends on:

  • Your risk appetite: Higher-risk investors may hold more growth-oriented funds, while conservative investors may prefer stability-focused funds.
  • Your asset allocation: Your mix of equity, debt, gold, and international exposure should guide how many funds fit into each bucket.
  • Your investment horizon: Longer horizons allow for more equity-oriented funds, whereas shorter timelines require simpler, lower-volatility combinations including Debt or Hybrid oriented funds.

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FAQs

Is it risky to invest in multiple mutual funds?

It is not necessarily risky to invest in several mutual funds, but holding too many of them can lead to excessive overlap and diluted returns. How many SIPs should I have? You can have multiple SIPs, but you must try to link them to different goals or fund categories. If you have many SIPs across similar funds, consolidate them.

Should I invest in more funds for better diversification?

 

Diversification stops adding value after a certain point. To build a balanced portfolio, you must focus on choosing a few good funds across different categories rather than adding more funds.

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