How Many Mutual Funds Should I Own in My Portfolio? (2024)

You must have heard of diversification.

Every investment advisor asks you to diversify your investments to safeguard them from sudden risks. But do you know you can overdo it?

Overdiversifying can prevent you from making good gains!

So the question now arises, how many mutual funds should you have?

Over-Diversification of Mutual Funds

The aim of diversification is to spread risk. If you invest too much in one company’s stock, you are at great risk.

If something happens to that company, a significant portion of your money could get wiped away. So to mitigate that risk, you buy shares of many companies.

And to mitigate risk further, you buy shares of companies from different industries. So even if one entire industry is performing poorly, a good percentage of your money will still remain safe.

But if you invest in too many companies, and one of them does very well, your investment won’t gain much. The company that did well would have had a very small impact on your total investment. So you should limit yourself to owning a few shares from most industries.

Sounds fair.

But should you apply the same logic to your mutual funds? No, not really. This is because equity mutual funds themselves buy shares from very diverse industries.

Typically, equity mutual funds at any point are invested anywhere between 50 to 100 shares. So when you invest in an equity mutual fund, you are indirectly owning shares of that many companies. Your portfolio is already very diversified!

How Many Mutual Funds Should I Own?

Mutual funds are of many types.

Large cap equity mutual funds invest only in large cap company shares. Investing in many large cap mutual funds is not necessary. One well-chosen large cap mutual fund should be enough.

Mid cap equity mutual funds invest in mid cap companies only. Mid cap companies grow at much higher rates when compared to large cap companies. At the same time, the risk is also much higher.

After careful research, you can consider owning a few mid cap mutual funds. The chances of overlap of ownership of shares is lower in the case of mid cap mutual funds because the number of mid cap companies is much higher.

Small cap mutual funds, as the name suggests, invest in small cap companies. Small cap companies are very volatile and can lead to meteoric rises and spectacular falls. The risk in case of small cap mutual funds is very high.

The chances of overlap of shares are lower in the case of small cap mutual funds. But it must be remembered, these mutual funds are very risky.

Debt mutual funds, invest money in bonds and other market instruments. They are low risk, low returns mutual funds. Debt mutual fund returns are very consistent over time and somewhat similar.

Sectoral mutual funds invest money in certain sectors or industries only. From a risk perspective, investing in a sector mutual fund is almost the same as buying shares in one industry only. You should have good knowledge of a certain sector to pick up a mutual fund in any given sector.

So, How Many Mutual Funds Should You Invest in?

The answer to that, as usual, depends on you. 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:

  1. 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.
  2. Mid Cap Mutual Funds: Up to 2. While you might get higher returns, the risk you expose yourself to is also higher.
  3. Small Cap Mutual Funds: Up to 2. Given how high the risk is with these mutual funds, it is best to limit yourself to a limited number of small cap mutual funds. Also, avoid putting in a great percentage of your total mutual fund investment in small cap mutual funds.
  4. Debt Funds: Ideally 1, but 2 is also good. Most debt mutual funds give you similar returns so it doesn’t make sense for you to own multiple debt mutual funds.
  5. Sectoral Mutual Funds: The number of sector mutual funds you invest in should be the number of industries you have great knowledge about. You should skip investing in these if you don’t have a very good idea of the sector the mutual fund is investing in.

So, about 8 (or +/- 2) mutual funds seem like the ideal number of funds to own. There is nothing wrong if you want to own significantly more or less mutual funds than suggested here, provided your decision is well-informed.

You May Also Be Interested to Know

1.

How to Invest in Mutual Funds

2.

10 Tips to Invest in Mutual Funds

3.

How to Choose Mutual Funds in India

4.

Advantages and Disadvantages of Mutual Funds in India

5.

Things to Know Before Investing in Mutual Funds India
How Many Mutual Funds Should I Own in My Portfolio? (2024)

FAQs

How Many Mutual Funds Should I Own in My Portfolio? ›

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.

How many mutual funds should a portfolio have? ›

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 4 mutual funds too many? ›

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.

Are 10 mutual funds too many? ›

There is no one right answer to questions like how many funds should I invest in. But just adding new funds to the portfolio to 'diversify' or reduce risks doesn't work. So, in general, having 1-2 schemes in the chosen fund category would be sufficient.

How many funds do I need in my portfolio? ›

Financial planners say it is difficult to put a cap on the number of schemes in an investor's portfolio, as investors increasingly use mutual funds to meet both long-term and short-term goals. However, they feel investors should restrict themselves to 10 schemes, as a higher number is difficult to monitor and manage.

Is the 3 fund portfolio good enough? ›

The three-fund portfolio is a sound investing approach, and you can't go wrong with it. If you set up asset allocation appropriate for your age, a three-fund portfolio will most likely perform well. I say "most likely" because nothing is guaranteed with investing, but this strategy is one of the safer options.

How many mutual funds should a person have? ›

Depending on their investment goals and risk tolerance, investors should strive to build a diversified portfolio of 3 to 5 debt mutual funds comprising a mix of short- and long-term funds.

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