Investing in mutual funds is a popular way to grow your wealth because it offers diversification, professional management, and easy access. When it comes to the ideal number of mutual funds in your portfolio, financial advisors often say, “Don’t put all your eggs in one basket.”
While diversification is crucial for a balanced portfolio, it’s not always clear how much is too much. This blog aims to clarify how many mutual funds you should invest in to achieve the right balance without overdoing it.
How Many Mutual Funds Should I Have in My Portfolio?
No fund manager or advisor can tell you the perfect number of funds for your portfolio, but aiming for 6 to 8 funds can be a good strategy. This range can match your investment objectives, provide adequate diversification, and mitigate risks. Here is how you can invest in mutual funds, keeping this in mind.
- Equity Funds
Equity funds invest mainly in stocks, aiming for significant growth and capital appreciation over the long term. It is recommended to allocate 60-70% of your portfolio to these funds.
Example Allocation:
- 0-35% in large-cap funds for stability.
- 15-20% in mid-cap funds for moderate growth.
- 10-15% in small-cap funds for high growth but higher risk.
- 10-15% in sector or thematic funds for targeted exposure to high-growth industries.
- Debt Funds
Debt funds invest in fixed-income securities like bonds and treasury bills, focusing on preserving capital and generating regular income. It is recommended to allocate 10- 20% of your portfolio to these funds.
Example Allocation:
- 5-10% in short-term debt funds for liquidity and low risk.
- 5-10% in medium-term debt funds for moderate returns and risk.
- 0-5% in long-term debt funds for higher returns but higher interest rate risk.
- Hybrid Funds
Hybrid funds combine investments in both equities and fixed-income securities, providing a balanced approach to growth and income. It is recommended to allocate 20-30% of your portfolio to these funds.
Example Allocation:
- 10-15% in aggressive hybrid funds for higher equity exposure.
- 5-10% in balanced hybrid funds for a mix of equity and debt.
- 5-10% in conservative hybrid funds for more stability and regular income.
Following this allocation can help you balance growth, stability, and risk in your portfolio.
Optimal Number of Mutual Funds: Is Less More?
Now that you know “how many mutual funds should I have in my portfolio”, let’s see why.
1. Adequate Diversification
One of the main benefits of mutual funds is the diversification they offer. By investing in 6 to 8 mutual funds, you can own a broad range of securities within a manageable number of funds. This spreads your investment risk and increases the chance to maximise returns.
Proper research is also essential to know about the different types of mutual funds and their investment modes to make sound decisions.
2. Reduced Overlap
Holding 6 to 8 funds helps minimise the risk of portfolio overlap. Investing in too many similar mutual funds can result in holding the same stocks across multiple funds, which undermines true diversification.
For example, a Blue Chip fund, a Multi-Cap fund, and a Dividend Yield fund may all include similar stocks. By limiting your portfolio to 6 to 8 funds, and doing thorough research beforehand you can avoid this overlap.
3. Cost Efficiency
Managing 6 to 8 mutual funds is cost-effective. Investing in mutual funds involves costs like expense ratios, management fees, and transaction fees. By keeping the number of funds within this range, you can manage these costs more efficiently.
Too many funds can increase expenses unnecessarily, eating into your returns.
4. Performance Monitoring
Limiting your portfolio to 6 to 8 mutual funds makes performance monitoring more manageable. With too many schemes, you could over-diversify, making it challenging to keep track of each fund’s performance.
Also, maintaining records of all mutual fund schemes makes it easier to file taxes with fewer funds.
Factors to Consider While Selecting Funds
You need to consider the following factors while investing in mutual funds:
- Risk Tolerance: Your risk appetite determines the types of funds that suit you. If you’re willing to take higher risks, allocate more to equities. If you’re risk-averse, lean towards debt funds.
- Financial Goal: Your investment goal matters. Suppose you aim for capital appreciation and focus on stocks. If you want a steady income, balance with more debt funds.
- Investment Horizon: The period you plan to invest affects your choices. A longer horizon allows for higher risk and more stocks. A shorter horizon, especially near retirement, calls for safer investments like debt funds.
Conclusion
In summary, holding 6 to 8 mutual funds is ideal for a well-balanced portfolio. This range provides optimal diversification, minimises overlap, and keeps costs manageable.
By carefully selecting funds across equities, hybrids, and debt, you can achieve growth, stability, and effective risk management in your investments.
Investing in mutual funds can be a smart way to grow your wealth while benefiting from professional management and diversification. By choosing to invest with a platform like Dhan, you gain access to a range of mutual fund options tailored to different financial goals and risk profiles.
Whether you’re a seasoned investor or just starting, mutual funds offer a structured way to build wealth over time. Remember, investing is a journey, and each step you take brings you closer to financial stability and growth.
FAQs
- What is the ideal number of mutual funds to hold in a portfolio?
Generally, 3-5 funds can offer enough diversification for most investors, balancing risk and returns without unnecessary complexity. - How many mutual funds are too many in a portfolio?
Holding more than 8-10 funds can dilute your returns, increase management costs, and make it harder to track performance effectively. - What factors should I consider when deciding the number of mutual funds in my portfolio?
Key factors include your investment goals, risk tolerance, fund types (equity, debt, hybrid), and the need for diversification. - Can I diversify effectively with just one mutual fund?
Some balanced or multi-asset funds provide reasonable diversification, but 2-3 funds across different asset classes generally offer a more balanced approach. - Is there a downside to having too few mutual funds in a portfolio?
Yes, with too few funds, your portfolio may lack diversification, leading to higher risk if one fund underperforms.
