How Many Mutual Funds are Too Many

How Many Mutual Funds are Too Many

Talk to the most proficient investors today and they will tell you that fund allocation in a portfolio is of the utmost importance. Moreover, a diversification of funds is the sensible way to allocate your funds, and this translates to calculated risks. Consequently, with different assets in your portfolio, you stand the chance of gaining returns as some assets may do poorly, but others lend a balance and do well. So, it's really about the ideal equilibrium in a portfolio that gives you decently good returns. Most often, investors are likely to fail in getting their desired returns simply because they may hold too many assets in the same class. This is true for mutual funds. Too many isn’t good, but nor is too little. Hence, how can you tell if ‘how much’ is ‘too much’? It's not that much of a challenge if you think about it in a rational way, as you will soon see. 

The Issue of ‘Too Much’

In this day and age, it is common knowledge that mutual funds have all but established themselves as the asset of choice for many serious investors. They can help to diversify portfolios and help you attain your long-term financial objectives. However, it's a common occurence to find investors holding on to plenty of mutual funds in a single portfolio, or over many portfolios. Of course, their intentions come from the right place, that of diversification of their portfolios, apparently believing in the fact that their risks will be mitigated, and returns enhanced. Unfortunately, this doesn’t happen, and returns are poor. When you open a Demat account and hold too much in the nature of mutual funds, that too, of a similar kind, your returns can be diluted. What happens is that losses from schemes that are high-performing get cancelled out by too many schemes that are low-performing. 

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. In a scenario such as this, it's a challenge to generate good returns if you own practically the entire market, so to speak. If you have the word ‘plenty’ in your mind, it's better that you go in for an index fund. You save in costs, getting over the shocks linked to the underperformance of your funds. 

A Solution

Another problem you may face when you have too many mutual funds in your kitty is that they are difficult to monitor. However, there is a right way to go about investing in mutual funds while ensuring the diversification of funds takes place. The appropriate approach to take is targeting the right fund in the correct proportion. Also, mutual funds give you the leeway to rebalance your portfolio with regularity. In this way, you can identify the laggards in your fund and get rid of them. The solution is no magic number of funds you should hold in your portfolio, but a sensible way to find the right amount. Where equities are concerned, investors have a plethora at their feet and this can be overwhelming with small-cap, large-cap and mid-cap funds flooding the market. 

However, analysts say that at any point of time, three to five mutual funds . A few multi-caps, combined with one large-cap and a mid-cap, should do the trick. If your appetite is a high-risk one, then you may pick a fund of small-caps. Additionally, you should make sure that funds you pick don’t hold the same stocks.  Overlapping doesn’t do an iota of good. Regarding debt funds, you should have liquid funds as a portion of your financial portfolio. This is so that you can grow a corpus for emergencies.

Sum it Up with MO

Mutual fund investment offers many benefits to investors looking for regular and good returns. However, the right diversification through appropriate fund allocation is required, and MO or Motilal Oswal is the perfect broker to help you achieve this. Portfolio management services are what this fine brokerage is all about. 

Related Aritcles:

How to Analyse Mutual Funds for Big Returns | Things to Know Before Investing in Mutual Funds | Mutual Fund - Need of Financial Plan | How to Open a Demat Account Without a Broker | Factors to Keep in Mind While Opening a Demat account | Upcoming IPO | LIC IPO

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