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Wrong.
When it comes to mutual fund investing, diversification is important but over-diversification can be counterproductive. Let’s dive into this often misunderstood topic and find out the optimal number of mutual funds you should ideally hold.
🎯 Why Do People Invest in Too Many Mutual Funds?
There are 3 common reasons:
- Fear of Missing Out (FOMO): Every time a new fund performs well, many investors rush to add it to their portfolio.
- Misunderstanding Diversification: People confuse “diversifying across asset classes” with “buying too many funds in the same category.”
- Lack of Review: Old SIPs continue while new ones keep getting added—resulting in duplication and clutter.
🧠 What is True Diversification?
True diversification means:
- Investing across different asset classes (equity, debt, gold)
- Within equity: diversifying across market caps (large-cap, mid-cap, small-cap)
- And exposure to different investment styles (growth, value, blend)
Holding multiple funds from the same category (e.g., 5 large-cap funds) doesn’t give you real diversification—it gives you repetition.
📉 Why Over-Diversification is a Problem
- Reduces Returns: Overlapping holdings mean you're essentially holding the same stocks via different funds.
- Complicates Monitoring: It becomes hard to track, compare, or review performance effectively.
- Tax Confusion: Managing redemptions, capital gains, and exit loads gets complex.
- Dilution of Gains: If one fund performs exceptionally, its impact is reduced across too many schemes.
✅ So, What’s the Ideal Number?
Here’s a simple guideline:
Investment Type Ideal No. of Funds Equity Funds 2 to 4 (across categories) Debt Funds 1 to 2 (based on goals) Hybrid / ELSS Optional, 1 if needed
🔹 Beginners: Start with 1-2 diversified funds (like a flexi-cap + ELSS) 🔹 Advanced Investors: May add sectoral/thematic funds—but with clear purpose
💡 Rule of Thumb: “Each fund in your portfolio should have a unique role.”
📌 How to Clean Up an Overloaded Portfolio
If you already hold 8-10 schemes:
- Identify overlap using portfolio analysis tools (like Value Research, Morningstar)
- Exit non-performing or duplicate funds gradually (consider tax implications)
- Consolidate into high-quality, low-cost, consistent performers
🧾 Real-Life Example
Let’s say you hold:
- 3 large-cap funds
- 2 flexi-cap funds
- 1 mid-cap
- 2 ELSS funds
- 1 international fund
Problem? The large- and flexi-cap funds may already have 60–70% overlap in top holdings. Better Approach? Choose 1 large-cap, 1 flexi-cap, and maybe 1 international for exposure.
💬 Final Thoughts
Investing should be simple and purposeful. You don’t need 10 mutual funds to build wealth. You need 3–4 well-chosen funds aligned with your goals, risk appetite, and time horizon.
🚫 Don’t chase every trending scheme. ✅ Stick to quality, review annually, and invest with clarity.
