How many Mutual Funds should you have in your Portfolio?

If you are preparing Khichdi for 2 people or 25 people, what is the difference?  The difference is of quantity, you need more of the ingredients in preparing khichdi for 25 people. But do they change? If we add different ingredients which are not necessarily required, will it enhance the taste? NO.

Similarly, if your intent is to achieve goals and build long term wealth, do you need too many funds in your portfolio? Will they enhance returns?  Think about it. There are a total 36 categories of mutual funds in India across equity and debt. Imagine adding one fund from each of these categories. Do you think this will improve your portfolio performance. While the fundamental principle of investing is to diversify your portfolio and spread your risks, overdiversification does not help. On the contrary, it is likely to drag down your portfolio returns.

 So, coming back to the question, how many funds should you ideally have in your investment portfolio? Well, every fund you add in your portfolio should serve a different purpose. Refer to the table below.

Broadly, you can choose from – funds which can offer returns in line with the broader market (like an index fund), funds which can generate alpha compared to market and come with relatively higher risk (active funds), funds which offer portfolio stability and liquidity to meet short term goals (debt funds). Depending upon your risk appetite, you can also optionally add funds which do not form part of your core portfolio and you can play around with it and take tactical short-term bets (satellite portfolio). But be prepared to face losses too and part with the money you can afford to lose. Depending upon your experience in the markets, risk taking ability and time horizon, you can also choose a hybrid category which invests in a mix of equity and debt.

Further, the bigger mistake that investors make is of duplication – adding same category of funds in their portfolios. This typically happens in large cap funds which has a limited universe of only 100 stocks. Every large cap fund typically has bluechip stocks like a TCS, Reliance, Infosys, etc. So, it does not make sense to duplicate these in the portfolio. Similarly, many investors usually have 3-4 equity linked savings schemes (ELSS) in their portfolios as they add different ones each year to avail tax benefit under 80C. Such duplication does no good to the overall portfolio.

Keeping the above aspects in mind, having not more than 7-8 funds in a portfolio is good enough. This also spares the pain of tracking too many funds and folios and is convenient for the family later in the future. Remember, less is more! An investor can seek advice from a professional & competent investment adviser to construct his/her portfolio or when requiring a second opinion on the existing one.

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