Mutual funds are a popular and convenient way to invest money. They allow investors to purchase a basket of stocks and bonds in one transaction, diversifying their portfolio and giving them access to a wide range of investments.
With mutual funds, investors can benefit from professional asset management without the need to do all the research and analysis themselves. But should you invest in multiple mutual funds?
In this article, we’ll explore the benefits and drawbacks of investing in multiple mutual funds and discuss whether or not it’s a smart investment strategy. Before we dive into the pros and cons of investing in multiple mutual funds, let’s take a look at what mutual funds actually are.
What are mutual funds?
Mutual funds are investment vehicles that pool the money of various investors together to buy a basket of stocks, bonds, or other securities. The fund is managed by a professional fund manager who makes decisions about which securities to buy and sell based on experience and research.
By investing in a mutual fund, investors can gain exposure to a range of investments without having to do all the research and analysis themselves. There are two main types of mutual funds: actively-managed funds and passively-managed index funds.
Actively-managed funds are run by fund managers who actively select investments and adjust the portfolio according to their own judgment. Passive funds, on the other hand, mirror a stock market index and aim to replicate its performance without active management.
What are the benefits of investing in multiple mutual funds?
Diversification
The primary benefit of investing in multiple mutual funds is diversification. Diversification is an important part of any investment strategy as it helps to reduce risk by spreading your investments out over a range of different assets.
By investing in multiple mutual funds, you can gain exposure to a variety of different markets, sectors, and asset classes. This helps to reduce the overall risk of your portfolio and ensures that you don’t put too many eggs in one basket.
Access to professional management
One of the major benefits of investing in mutual funds is that you get access to professional asset management. Mutual funds are managed by experienced fund managers who have years of experience in selecting investments and adjusting portfolios to ensure optimal performance.
By investing in multiple mutual funds, you can benefit from the expertise of a number of different fund managers. This can be especially beneficial if you don’t have the time or knowledge to manage your own investments.
Cost efficiency
Another major benefit of investing in multiple mutual funds is cost efficiency. Mutual funds typically come with lower fees than individual stocks, exchange-traded funds (ETFs), or other investments. By investing in multiple funds, you can spread these costs out to make sure they don’t become too high.
Reduced volatility
Another advantage of investing in multiple mutual funds is that it can reduce volatility. Investing in a single fund has more volatility than investing in several funds. By investing in multiple mutual funds, you can spread out the risk associated with any one fund and reduce overall volatility.
What are the drawbacks of investing in multiple mutual funds?
Potential for over-diversification
Despite the benefits of diversification, there is a potential for over-diversification when investing in multiple mutual funds. When you spread your investments too thinly, it can lead to underperformance, as each individual investment may not be able to generate sufficient returns to offset the costs of the fund.
Complexity in tracking
Another potential drawback of investing in multiple mutual funds is the complexity it can add to your portfolio. With multiple funds, you have to keep track of all the different investments you own, as well as the performance of each fund.
This can be difficult to manage on your own, especially if you have a large number of funds. Additionally, trying to coordinate all the different investments can be time-consuming, and it can be hard to keep track of when you need to rebalance your portfolio.
Higher transaction costs
Investing in multiple mutual funds also comes with higher transaction costs. Each time you buy or sell a fund, you will incur trading fees. Over time, these can add up and eat into your returns. Additionally, some funds may require additional fees such as annual maintenance fees or redemption fees.
Investing in multiple mutual funds can be a smart move for investors who want to diversify their portfolios and gain access to professional asset management.
However, it’s important to be aware of the possible drawbacks, such as the potential for over-diversification and higher transaction costs. Ultimately, the decision to invest in multiple mutual funds should be made on a case-by-case basis depending on your individual needs and goals.
Too many mutual funds
First Published: 17 Mar 2023, 08:46 AM
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Topics to follow
- Personal finance
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- Lessons in Investing
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FAQs
Investing in multiple mutual funds can be a smart move for investors who want to diversify their portfolios and gain access to professional asset management. However, it's important to be aware of the possible drawbacks, such as the potential for over-diversification and higher transaction costs.
Is it 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.
What are the pros and cons of investing in mutual funds? ›
Some of the advantages of mutual funds include advanced portfolio management, dividend reinvestment, risk reduction, convenience, and fair pricing, while disadvantages include high expense ratios and sales charges, management abuses, tax inefficiency, and poor trade execution.
Can you invest in multiple funds? ›
When you hold a number of funds, the number of investments you hold can increase dramatically. Sometimes, funds can overlap investments. For example, if you invest in 10 funds with a similar investment objective, you may find the holdings are similar and you're not as diversified as you thought you were.
Is it good to invest in mutual funds? ›
Mutual fund investments when used right can lead to good returns, keeping risk at a minimum, especially when compared with individual stocks or bonds. These are especially great for people who are not experts in stock market dynamics as these are run by experienced fund managers.
Is it good to have multiple investment accounts? ›
More accounts means more to manage
Rebalancing happens when you want to adjust your portfolio allocations so to better minimize taking on more risk as the market changes.
Is it smart to have multiple investment accounts? ›
Multiple Brokerages Help Diversify and Manage Risk
Some investors choose to work with multiple brokerages to mitigate risk and protect their assets. Spreading your assets across different brokerage accounts can help protect you against potential fraud or unauthorized access, Roller says.
What is the dark side of mutual funds? ›
However, mutual funds are considered a bad investment when investors consider certain negative factors to be important, such as high expense ratios charged by the fund, various hidden front-end, and back-end load charges, lack of control over investment decisions, and diluted returns.
Why people don t invest in mutual fund? ›
As the funds are invested in market instruments, they carry certain stock market risks like volatility, fall in share prices etc., which deters us from investing in mutual funds. As we don't want to lose money, we often let it stagnate in our savings accounts.
Why not to invest in multiple mutual funds? ›
The Downside of Diversification
While mutual funds are popular and attractive investments because they provide exposure to a number of stocks in a single investment vehicle, too much of a good thing can be a bad idea. The addition of too many funds simply creates an expensive index fund.
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 funds is too many in a 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.
How do mutual funds spread risk? ›
Mutual funds pool money from multiple investors to invest in various assets, spreading risk. While individual stocks can be riskier due to their concentrated nature, mutual funds offer diversification, potentially reducing overall risk.
Why are mutual funds considered a high risk form of investment? ›
Volatility: High-risk mutual funds are more volatile than other types of mutual funds. The value of your investment may fluctuate significantly over time.
How much is safe to invest in mutual funds? ›
You must strive to save at least 30% of your gross income or ₹60,000 every month. To calculate how much amount you should invest in SIPs, we will have to use the standard formula, which is 100 minus your age to be invested in equity through mutual funds.
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.
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 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.”
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.
