Is it bad to have too many mutual funds?
The Downside of Diversification
Now there's no one golden number that there are 5 mutual funds right for all investors. It actually depends on the investor to investor, depending on their financial goals. From your financial goals, your time horizon of investment and risk profile are determined.
Disadvantages include high fees, tax inefficiency, poor trade execution, and the potential for management abuses.
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.
Financial-industry experts also agree that over-diversification—buying more and more mutual funds, index funds, or exchange-traded funds—can amplify risk, stunt returns, and increase transaction costs and taxes.
Understanding when you have too many funds
While it's important to make sure your portfolio is properly diversified, having too many funds can make it difficult to keep track of your investments. You should therefore only keep as many funds in your portfolio as you're comfortable monitoring.
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.
Ideally, 6 to 8 funds are good enough to build your MF portfolio. As the size of the portfolio increases, you may invest in a maximum of 10 funds to reduce the risk of being overdependent on any particular fund or fund house. However, the funds you are investing in are across equity, debt and hybrid categories.
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.
One selling point is that they allow you to hold a variety of assets in a single fund. They also have the potential for higher-than-average returns. However, some mutual funds have steep fees and initial buy-ins. Your financial situation and investment style will determine if they're right for you.
Should I keep my money in mutual funds?
Mutual funds help provide instant diversification since they invest across dozens or sometimes hundreds of individual stocks, bonds, or other securities. Further, history shows that large groups of stocks tend to ride out market volatility better than individual stocks.
All investments carry some risk, but mutual funds are typically considered a safer investment than purchasing individual stocks. Since they hold many company stocks within one investment, they offer more diversification than owning one or two individual stocks. Can I get rich by investing in mutual funds?
I've seen investors with 10-12 mutual funds in their portfolio for a single financial goal. Usually, their portfolio will contain 3-4 large-cap fund, another 3-4 mid-cap funds, few random debt funds, and perhaps a hybrid fund tucked in.
Profits are only limited by the investments inside the fund. Millions of investors use mutual funds to make their money grow. As with any investment, if you pick the right mutual fund, your money can grow substantially over the long run. However, not all mutual funds are equal in terms of their potential for growth.
| Top small cap mutual funds | Annual Returns 2023 |
|---|---|
| Bandhan Small Cap Fund | 49.48% |
| Franklin India Smaller Companies Fund | 49.44% |
| ITI Small Cap Fund | 48.54% |
| Quant Small Cap Fund | 44.90% |
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.
Basically, the rule says real estate investors should pay no more than 70% of a property's after-repair value (ARV) minus the cost of the repairs necessary to renovate the home. The ARV of a property is the amount a home could sell for after flippers renovate it.
It can also be prudent to limit exposure to any single fund to no more than 15% of your overall portfolio. While it's important to have a mix of styles and strategies to achieve diversification, that doesn't mean you need a long, unwieldy list of funds.
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.
S&P Dow Jones Indices' scorecard compares the performance of actively-managed mutual funds to major indices. It found that over the course of one year, 51.08% of actively-managed mutual funds underperformed the S&P 500, and 48.92% of actively-managed funds outperformed the S&P 500.
Is it wise 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.
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.
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.
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.
Ideally, 6 to 8 funds are good enough to build your MF portfolio. As the size of the portfolio increases, you may invest in a maximum of 10 funds to reduce the risk of being overdependent on any particular fund or fund house. However, the funds you are investing in are across equity, debt and hybrid categories.
