Mutual funds are generally the asset of choice for every experienced investor since they can help one attain long-term financial objectives. Still, it is also a common occurrence that one can hold onto a lot more mutual funds in a portfolio than required. The reason behind this may be that the risks might be mitigated, and the returns will increase. But that typically does not happen, and it may even lead to worse returns. As such, it is important to understand how many mutual funds an individual should invest in. It should be enough that it ensures a positive outcome but not so much that it becomes costly. For that, we have created this guide on how many mutual funds you should invest in.
How Many Mutual Funds Should I Have?
The number of mutual funds one should own can vary since they are of different types. For instance, large-cap equity funds only invest in large-cap organisation shares. Investment in a lot of these funds is not required, so one large-cap mutual fund is enough for any portfolio.
Similarly, mid-cap equity mutual funds only invest in the mid-cap organisations. These companies grow at higher rates compared to the large-cap ones, but the risk also remains a lot higher. One could consider having some mid-cap mutual funds, but the chances of overlapping the share ownership are lower since the number of mid-cap organisations is higher.
Small-cap mutual funds invest in small-cap organisations. These are extremely volatile and can lead to great falls and meteoric rises. This can be one of the riskiest investments. Whereas, sectoral mutual funds are all about investing money only in specific industries and sectors. This requires one to have good knowledge about the industry or sector they want to invest in. Lastly, the debt mutual funds invest money in debt securities including money market instruments since they are low returns and low risk.
How Many Mutual Funds Should I Invest In?
The answer "How many mutual funds should I have?" question depends on you but also the market. To ensure that you get the best return and secure your portfolio in one go, you can use a rule of thumb when investing in different kinds of mutual funds. Below are the number of funds one could invest in depending on the type.
Mid-Cap Mutual Funds: If you want to invest more in mid-cap mutual funds, then two is a good number. This may provide you with higher returns, but it also exposes you to higher risk.
Large-Cap Mutual Funds: Large-cap mutual funds should also be invested up to two or three times. It won’t make sense to invest more than that since there might be an overlap in the shares possessed by the mutual funds.
Debt Funds: Ideally, it's best to invest in only a single debt fund, but investing in two is also fine. Most of the debt mutual funds provide similar returns, so it is not practical to have multiple debt mutual funds.
Small-Cap Mutual Funds: It’s better to invest in only two small-cap mutual funds since the risk is too high. As such, one must limit themselves to a small number of these mutual funds. Also, investors should avoid putting a great percentage of their total mutual fund investment in small-cap funds.
Sectoral Mutual Funds: The amount of sector mutual funds one invests in must be the number of industries one knows about.
Conclusion
Mutual fund investment has many benefits for investors who are looking for good and regular returns. However, it is necessary to have the right diversification through good fund allocation. It is also important to research more about the different kinds of mutual funds and what risks each of these may possess.
Ensure that you don’t have a lot of mutual funds in your portfolio since it will become difficult to monitor all of them. So, it's better to target the right fund in the correct proportion. This will help you balance your portfolio with regularity, ensure a positive return, and you can also get rid of any laggards you may identify in your fund.
Note: The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, affiliates or representatives (“entities & their affiliates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
