How many mutual funds should you have in your portfolio?

One of the many advantages of Mutual funds is diversification. By investing in a number of stocks that have been well researched about by the fund manager, mutual funds help diversify the risk and contribute to growing your wealth.

However, owning too many Mutual Funds is also counterproductive. Low performing mutual funds could negate returns from the better performers. It could lead to stock overlap, that is, a stock that is invested in by all Mutual funds that you own. On an average, a mutual fund owns 60-70 stocks so the probability of a stock being owned by a couple of Mutual funds is likely. It will also become difficult to review your portfolio, an activity that should be conducted regularly to ensure proper asset allocation in your investment portfolio. So how many Mutual funds should you have in your portfolio? There is no precise answer to this question.

If you are a first time investor, new to investing in Mutual funds then consider starting with an index fund or a large cap fund. 2-3 funds should be enough. As your income grows and your experience monitoring your portfolio increases, you can start adding funds.

However, set clear financial goals. Create a portfolio whose aim is to meet certain goals. But that doesn’t mean one fund per goal. One fund can help achieve multiple goals.

Ensure your mutual fund portfolio has a good mix of styles and strategies. Invest across different market capitalizations, asset classes and sectors to avoid concentration risk. So consider flexi cap, long duration funds etc.

But as you do this, keep your risk appetite and time frame for investing in mind.

When you would like to add a fund ask yourself one, how will the fund complement your existing portfolio. If you have only large caps or index funds, it’s probably a good idea to add a midcap or a small cap fund, if your risk appetite allows for it. The second thing to ask yourself is if the new fund should replace any existing fund. It’s possible that a certain fund does not meet your financial goal or your goal has neared and it’s time to redeem the fund.

The fund you intend to add can replace that fund, thus ensuring you’re mutual fund count doesn’t go too high.

Mutual fund investments are subject to market risks, read all scheme related documents carefully.