When it comes to investing in equity funds, Indian investors have a lot of choices. In fact, a little too much choice. There are almost 40 AMCs offering schemes in almost each of the 10+ equity fund categories. So just in the equity fund space, there are at least 300+ options for investors to choose from.
But while the choice of funds can get overwhelming, investors themselves don’t regularly review and clean up their mutual fund portfolios. Most investors start investing in a fund or two. But then, and over a period of next few years, they keep adding new funds to their portfolio. And most of them don’t look at cleaning up their portfolios.
The result is that very often, investors end up with a portfolio of an unnecessarily large number of funds. And it’s quite common to see several funds of similar types in portfolios in the name of diversification. But while diversification is important, it doesn’t mean that you keep adding new funds to your portfolio.
Investing in too many funds, and justifying it as diversification, is redundant. Beyond a point, there are no additional (diversification) benefits available if you increase the number of funds in the portfolio.
Let’s understand this with a few examples to drive home the idea.
Suppose you decide to invest inlargecap funds. And to ensure that you are properly diversified, you pick 3 active large cap funds and 1 large cap index fund. Now you may feel that you are diversifying well. But the reality is different. As per SEBI’s categorization rules, a large cap fund needs to invest at least 80% in stocks of only the top-100 companies.
Now if you open the bonnet (or underlying portfolio) of each of these large cap funds, you will see a lot of similar names as the universe of stocks available to be invested is limited by SEBI rules.
So, to a large extent, each of the funds you have chosen will have a lot of overlap with each other. There will be no real diversification if you increase the number of pure large cap funds in your portfolio. Just investing in 1-2 large cap funds, whether active or passive or both, is more than enough for most investors.
If you really want to diversify, you need to invest across different fund categories and not just within a category. That way, the above-average performance of one category can offset the underperformance of another category at any given time.
That was about large cap funds. But what about other popular categories like flexicap funds, midcap funds, smallcap funds?
While passive funds are advisable for large cap funds, for mid-&-smallcap exposure, there is still a lot of potential for alpha generation via active investing by good fund managers. So, if one has to not have too many funds in the mid & smallcap categories, then one can go for 1-2 proven, well-managed, activemidcap funds and depending on the size of the overall portfolio 2-3smallcap funds.
For picking funds from theflexicap category, 1-2 funds are enough provided the inter-scheme overlaps are limited and there is style diversification.
But it must be noted that midcaps and smallcaps can be very volatile in the short term and hence, the total exposure to these two market segments, across all funds combined, should be limited to a maximum of 30-40% for most investors. The rest 60-70% should be to large caps.
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. That is assuming one doesn’t have too many fund categories in their mutual fund portfolio in the first place.
Dev Ashish is a SEBI-Registered Investment Advisor and Founder (Stable Investor). He provides fee-only financial planning and investment advisory services to small and HNI clients across India.
First Published:
27 May 2023, 12:31 PM IST
FAQs
If you are a largecap oriented investor and you keep adding multiple largecap funds to your portfolio, then there are chances that you will end up with a portfolio with huge overlaps and with most funds owning the same stocks across different schemes.
Is it bad to invest in too many mutual funds? ›
If you have too many mutual funds in your portfolio, you will soon find it hard to keep track of how your capital is distributed across different asset classes. Your mutual fund investments may also start to overlap, since certain stocks or securities may be common in different funds.
Is it okay to have 7 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.
What is the ideal number of mutual funds in a portfolio? ›
Diversification ensures you get the best returns, or so goes common advice. Rohin Pagdiwala, CFP and founder of Pagdiwala Investments, said a portfolio can achieve sufficient diversification with 7-10 funds. Asset allocation should determine the selection of funds, he said.
How many mutual fund portfolios should I have? ›
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.
How many funds should you have in a portfolio? ›
Wood at Quilter Cheviot says: “The number of funds in a portfolio can range from 10 if you are just investing in global equities, to around 30 if you are investing regionally and looking to balance the risk and approach taken.”
How much will I get if I invest $50,000 in mutual funds? ›
Considering 9% returns, an investment of Rs 50,000 can fetch you Rs 2,80,220 in fd in 20 years. Many people even ensure to use the FD Calculator to correctly estimate how much they can earn after a certain time period based on the ROI.
What is the 3 5 10 rule for mutual funds? ›
Specifically, a fund is prohibited from: acquiring more than 3% of a registered investment company's shares (the “3% Limit”); investing more than 5% of its assets in a single registered investment company (the “5% Limit”); or. investing more than 10% of its assets in registered investment companies (the “10% Limit”).
What is the 80% rule for mutual funds? ›
The Names Rule requires that if a Fund's name suggests that the Fund invests in a particular type of investment or investments, or in investments in a particular industry, group of industries, countries, or regions, then such Fund must adopt a policy to invest at least 80 percent of the value of its assets2 in such ...
What is the 15 15 15 rule for mutual funds? ›
The 15-15-15 rule suggests investing 15% of your income for 15 years in a mutual fund with 15% annual returns. Compounding is the process of reinvesting earnings to generate more returns. By following this rule, you can achieve long-term financial goals such as accumulating a substantial corpus for future needs.
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.
How do I know if my mutual fund portfolio is good or bad? ›
Scale Performance of the Fund Against the Benchmark
Well, the first thing is to analyze the performance of the benchmark. I am sure that you are aware that every fund has a benchmark that is used to track and measure its performance. A good mutual fund is one that constantly beats its benchmark in the long term.
How do I reduce the number of mutual funds in my portfolio? ›
How to reduce the number of mutual funds in the portfolio? Remove any fund whose exposure is less than 5% of the portfolio. If a fund is less than 5 per cent of the portfolio (equity funds) and you are not even adding to the fund, you must exit such fund. And do that ruthlessly.
Is it wise to have multiple mutual funds? ›
If you have a particular strategy or want diversification within your portfolio, then investing in multiple mutual funds can be a good idea. Diversification implies spreading your investments across different asset classes, industries, and geographical regions to reduce your overall risk.
Is it smart to have multiple portfolios? ›
It is a useful approach to generate insights that may influence your decision-making, including any portfolio changes that might be necessary to meet your goals. A multiple-portfolio strategy also helps remove some of the noise' when monitoring a large portfolio.
What is a good amount to put in a mutual fund? ›
To determine how much to invest in Mutual Funds monthly, subtract your monthly expenses including contributions to your emergency fund and short-term goals from your monthly income. The remainder is what you can allocate to investments.
How much money is safe to invest in mutual funds? ›
To determine how much to invest in Mutual Funds monthly, subtract your monthly expenses including contributions to your emergency fund and short-term goals from your monthly income. The remainder is what you can allocate to investments.
Is it better to invest in multiple funds or just one? ›
It's important to make sure that your portfolio is well-diversified, but holding too many funds means there's a risk some may overlap. The value of investments can fall as well as rise and you could get back less than you invest. If you're not sure about investing, seek independent advice.
Can I have 6 mutual funds? ›
In general, you can have upto 5 schemes. For long term purpose, you can select 1 large cap, 1 Mid cap, 1 small cap. By selecting all the 3 schemes, you will have a portfolio of all the best stocks across all market caps. Based on your risk aptitute, you can decide the percentage of amount to invest in each Market Cap.
Is it bad to have too many investment accounts? ›
More accounts means more to manage
Shari Greco Reiches, a behavioral finance expert and wealth manager at Rappaport Reiches Capital Management, also recommends avoiding using multiple brokerage accounts because it can be inconvenient and difficult to monitor them.
