How many mutual funds should you have in your portfolio?

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August 4, 2020 3:57 PM

If you want to know how many mutual funds are enough, there is no right answer to this, as different investors need different approaches. There is no one way for an investor to build an ideal portfolio.

Mutual fund, Mutual fund investment, Mutual fund industry, Mutual fund industry AUM in june 2020 quarter, debt fund, equity fund, asset under management, investing in stock, where to invest in stocks, MF investment, MF investment in equity markets, SIP, stock markets, sebi, COVID-19 outbreak, bajaj capital, market news,You could have a well-diversified portfolio with just a small number of funds from different categories.

There are many people who have been taking advantage of the volatile markets and putting their money in mutual funds. This shows that people are keen on investing in mutual funds, but more often than not, investors are seen ending up having an unnecessarily large number of schemes in their portfolios.

This is a problem that many investors face. Investors end up having too many funds, in the name of diversification. Most miss the point that diversification is not about having as many funds as possible. Experts say while diversification is important for any investment portfolio, having too many funds could be useless. After a certain point, no additional diversification benefits can be availed by investing in more funds.

Industry experts and financial advisers often recommend diversifying investor portfolios, however, going overboard with it is not a good idea. What investors do not understand is that over-diversification leads to compromise on the returns. It is so because it takes away the ability to invest a substantial amount in good schemes or instruments. Investors should keep in mind that they will not get additional diversification by investing in many funds from a single category. Having many similar funds only swells the portfolio of an investor. Investors could have a well-diversified portfolio with just a small number of funds from different categories.

How many MFs are enough for you?

If you want to know how many mutual funds are enough, there is no right answer to this, as different investors need different approaches. There is no one way for an investor to build an ideal portfolio.

In general, however, experts suggest having 1-2 schemes in the chosen fund categories, which would be enough, given an investor doesn’t have too many fund categories in his/her portfolio. Hence, 4-7 funds in total are what is suggested by experts to be adequately diversified. An investor’s asset allocation should be distributed among large-cap, mid-cap, small-cap, and multi-cap funds, according to his/her risk appetite and goals. Note that asset allocation differs according to an investor’s age, life stage, financial goals, and risk appetite. For instance, if an investor wants to play safe, large-caps will be ideal, whereas small-caps can be looked at by those who have a long investment horizon and medium- to high-risk appetite.

Therefore, review your mutual fund portfolio and do the cleanup and reduce the clutter, if you have too many funds in your portfolio, as having a scattered mutual fund portfolio doesn’t serve its purpose properly. You could also take the help of an investment advisor if you are unable to do that on your own.

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