How Many Mutual Funds are Too Many
Talk to the most proficient investors today and they will tell you that fund allocation in a portfolio is of the utmost importance. Moreover, a diversification of funds is the sensible way to allocate your funds, and this translates to calculated risks. Consequently, with different assets in your portfolio, you stand the chance of gaining returns as some assets may do poorly, but others lend a balance and do well. So, it's really about the ideal equilibrium in a portfolio that gives you decently good returns. Most often, investors are likely to fail in getting their desired returns simply because they may hold too many assets in the same class. This is true for mutual funds. Too many isn’t good, but nor is too little. Hence, how can you tell if ‘how much’ is ‘too much’? It's not that much of a challenge if you think about it in a rational way, as you will soon see.
The Issue of ‘Too Much’
In this day and age, it is common knowledge that mutual funds have all but established themselves as the asset of choice for many serious investors. They can help to diversify portfolios and help you attain your long-term financial objectives. However, it's a common occurence to find investors holding on to plenty of mutual funds in a single portfolio, or over many portfolios. Of course, their intentions come from the right place, that of diversification of their portfolios, apparently believing in the fact that their risks will be mitigated, and returns enhanced. Unfortunately, this doesn’t happen, and returns are poor. When you open a Demat account and hold too much in the nature of mutual funds, that too, of a similar kind, your returns can be diluted. What happens is that losses from schemes that are high-performing get cancelled out by too many schemes that are low-performing.
Too Much of Mutual Fund Investment
You must remember that each equity fund you invest in has at least 50 stocks. If you hold, say, 7 to 10 of these equity funds, you are in actual fact, investing in around 500 stocks on the high side. This figure could go higher, depending on your distinct number of funds. In a scenario such as this, it's a challenge to generate good returns if you own practically the entire market, so to speak. If you have the word ‘plenty’ in your mind, it's better that you go in for an index fund. You save in costs, getting over the shocks linked to the underperformance of your funds.
A Solution
Another problem you may face when you have too many mutual funds in your kitty is that they are difficult to monitor. However, there is a right way to go about investing in mutual funds while ensuring the diversification of funds takes place. The appropriate approach to take is targeting the right fund in the correct proportion. Also, mutual funds give you the leeway to rebalance your portfolio with regularity. In this way, you can identify the laggards in your fund and get rid of them. The solution is no magic number of funds you should hold in your portfolio, but a sensible way to find the right amount. Where equities are concerned, investors have a plethora at their feet and this can be overwhelming with small-cap, large-cap and mid-cap funds flooding the market.
However, analysts say that at any point of time, three to five mutual funds . A few multi-caps, combined with one large-cap and a mid-cap, should do the trick. If your appetite is a high-risk one, then you may pick a fund of small-caps. Additionally, you should make sure that funds you pick don’t hold the same stocks. Overlapping doesn’t do an iota of good. Regarding debt funds, you should have liquid funds as a portion of your financial portfolio. This is so that you can grow a corpus for emergencies.
Sum it Up with MO
Mutual fund investment offers many benefits to investors looking for regular and good returns. However, the right diversification through appropriate fund allocation is required, and MO or Motilal Oswal is the perfect broker to help you achieve this. Portfolio management services are what this fine brokerage is all about.
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How to Analyse Mutual Funds for Big Returns|Things to Know Before Investing in Mutual Funds|Mutual Fund - Need of Financial Plan|How to Open a Demat Account Without a Broker
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FAQs
Unless you are very well versed with the markets and have expert knowledge about mutual funds, a good rule of thumb would be to own: Large Cap Mutual Funds: Up to 2. Maybe 3 at best. Beyond that, it doesn't make sense as there will be a great overlap in the shares owned by your mutual funds.
Is it a good idea to invest in multiple mutual funds? ›
One should invest across various categories of companies/mutual fund schemes. This diversification should also be implemented across various mutual fund houses/sectors. The broad categories for equity investing are Large Cap, Mid Cap, and Small cap. One should invest in all these categories.
How many number of mutual funds should I have? ›
While there is no precise answer for the number of funds one should hold in a portfolio, 8 funds (+/-2) across asset classes may be considered optimal depending on the financial objectives and goals of the investor. Further, higher allocation of portfolio to the right fund is of crucial importance.
What is the average number of mutual fund holdings? ›
Mutual fund–owning households owned many funds through multiple purchase sources (Figure 1.6). In 2021, these households owned a median of four mutual funds. Forty-nine percent owned three or fewer funds, and 51 percent owned four or more.
What is the ideal mutual fund portfolio for a 40 year old? ›
An effort should be made to have a balanced portfolio - that is - having 40% equity and 40% debt funds. “Around 5% should be kept as emergency cash. Around 5% should always be maintained to take advantage of new opportunities," said Ajay Agarwal.
What is the ideal mutual fund portfolio for a 35 year old? ›
Let's factor in your age. There's a useful formula that suggests you invest a percentage equal to a hundred minus your age in a carefully selected portfolio of Equity Mutual Fund SIPs. That would be 65 per cent (100-35) of your monthly savings, which translates to Rs 39,000 per month (65 per cent of Rs 60,000).
Can I have 10 mutual funds? ›
Too Much of Mutual Fund Investment
You must remember that each equity fund you invest in has at least 50 stocks. If you hold, say, 7 to 10 of these equity funds, you are in actual fact, investing in around 500 stocks on the high side. This figure could go higher, depending on your distinct number of funds.
Is 5 mutual funds too many? ›
Maybe 3 at best. Beyond that, it doesn't make sense as there will be a great overlap in the shares owned by your mutual funds. Mid Cap Mutual Funds: Up to 2. While you might get higher returns, the risk you expose yourself to is also higher.
What is the 75 5 10 rule for mutual funds? ›
Diversified management investment companies have assets that fall within the 75-5-10 rule. A 75-5-10 diversified management investment company will have 75% of its assets in other issuers and cash, no more than 5% of assets in any one company, and no more than 10% ownership of any company's outstanding voting stock.
What is the 4% rule for mutual funds? ›
The 4% rule says people should withdraw 4% of their retirement funds in the first year after retiring and take that dollar amount, adjusted for inflation, every year after. The rule seeks to establish a steady and safe income stream that will meet a retiree's current and future financial needs.
Equity mutual fund investors hope to pocket 'decent' returns from their SIP investments over a long period. This prompted ETMutualFunds to look at the SIP performance of equity schemes in 10 years. We found out that 11 equity schemes have offered over 20% in the 10 year horizon on the investments made through SIP.
How long does the average investor hold a mutual fund? ›
The average holding period for a mutual fund can vary but is typically around 3 to 5 years.
What is the average ROI on mutual funds? ›
The average mutual fund return for a balanced mutual fund for the last 10 years as of 2021 is nearly 9-10%. In 2019, the average return on mutual funds was 16.3%. As of 2020, the average five-year return for large-cap mutual funds was around 11.9%.
What is the 80 20 rule investment portfolio? ›
In investing, the 80-20 rule generally holds that 20% of the holdings in a portfolio are responsible for 80% of the portfolio's growth. On the flip side, 20% of a portfolio's holdings could be responsible for 80% of its losses.
Why a 60 40 portfolio is no longer good enough? ›
“You cannot invest in one future anymore; you have to invest in multiple futures,” Rice said. “The things that drove 60/40 portfolios to work are broken. The old 60/40 portfolio did the things that clients wanted, but those two asset classes alone cannot provide that anymore.
What size portfolio do I need to retire? ›
By age 50, you would be considered on track if you have three-and-a-half to six times your preretirement gross income saved. And by age 60, you should have six to 11 times your salary saved in order to be considered on track for retirement.
Is it better to invest in one index fund or multiple? ›
Some index funds provide exposure to thousands of securities in a single fund, which helps lower your overall risk through broad diversification. By investing in several index funds tracking different indexes you can built a portfolio that matches your desired asset allocation.
How much should I invest in each mutual fund? ›
“Ideally, you'll invest somewhere around 15%–25% of your post-tax income,” says Mark Henry, founder and CEO at Alloy Wealth Management. “If you need to start smaller and work your way up to that goal, that's fine. The important part is that you actually start.”
Should I invest in mid cap and small cap funds? ›
If she is a conservative investor and is unwilling to take on much risk, then large caps are advisable. She must only consider investing in mid and small caps if she is willing to take high risk to earn higher returns and has a longer investment horizon, so as not to be tormented with the short-term volatility.
How should I divide my mutual funds? ›
Next, use the following rule of thumb: Subtract your age from 100 and put the resulting percentage in stocks; the rest in bonds. In other words, if you're 20 years old, put 80% of your assets in stocks; 20% in bonds.
