Many investors, in a bid to diversify, end up stuffing their portfolios with a large number of funds. This action might turn out to be counterproductive.
According to analysts, holding a larger number of mutual fund schemes doesn’t guarantee diversification; it can instead lead to overcrowding and overlapping of investments, which may instead hurt portfolio returns.
Instead of adding strength, an oversized portfolio often creates complexity, duplication, and behavioural fatigue, said Nikunj Saraf, CEO at Choice Wealth.
Cons of holding too many funds
The first and most common trap of holding too many funds is overlapping. This happens when multiple funds end up holding the same large stocks, particularly in categories like large-cap and flexi-cap.
This results in over-diversification, where returns get diluted while costs remain higher due to multiple expense ratios, said Narender Agarwal, Founder at Wealth1.
Tracking and rebalancing your investments is one another aspect that becomes tough when you hold too many stocks or funds. As monitoring performance and rebalancing become more complex, it leads to inertia or poor decision-making, added Agarwal. “Over time, such portfolios tend to deliver average returns, defeating the purpose of active fund selection.”
What is the ideal number of funds to hold?
While there is no magical number, most wealth advisors and financial planners that Mint talked to recommended that 4-6 funds spread across asset classes and stock categories can take care of the majority of the needs of an investor.
“The ideal number of mutual funds is not fixed. It should be the minimum number needed to cover each distinct category of exposure required for a specific goal, time horizon, and risk profile. For most retail investors in India who are investing toward a defined objective, this usually falls in the range of 4 to 6 funds,” said Saraf, adding that a number beyond that can make portfolios “cluttered”.
A compact portfolio ensures meaningful allocation to each fund while avoiding duplication of strategies.
Jitendra Solanki, a Sebi-registered research analyst, said that anything beyond five funds won’t really help in the diversification process because if you have five different categories in a portfolio, you can cover the entire market and different asset classes.
Which funds should you hold?
A diversified portfolio should be built around clear roles for each fund, not around the number of schemes, according to experts. The idea should be to combine funds that complement each other across market capitalisation, investment style, and asset class.
Commenting on the choice of funds, Solanki said that these can be spread across large-caps, flexi-cap, mid-cap, multi-asset and a gold fund. He said that large-cap funds should ideally form 50-60% of the portfolio. He also suggested that, in place of a large-cap fund, investors can also look to add an index fund.
Echoing similar views, Agarwal said that investors can consider a combination such as a Nifty 50 index fund, a large-cap fund for core exposure, a flexi-cap fund for dynamic allocation, a mid-cap fund for growth, and a short-duration debt or balanced advantage fund for stability.
Apart from these funds, Saraf said that depending on the goal, retail investors may also look to add debt funds, gold funds, or international funds. The key is to avoid duplication and make sure each fund adds a distinct purpose to the portfolio, he said.
Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
