By now, mutual fund investments have established themselves as one of the best asset classes to help investors build wealth that caters to their varying investment goals. There are several benefits of mutual funds, the primary one being they act as a fantastic tool to diversify your investment portfolio. They can help you create wealth or preserve your capital depending on your investment needs. They are an ideal investment option to cater to your investment needs – be they short-term or long-term investment goals.
However, there are times when an investor cannot fetch the anticipated returns on their mutual fund investments. One of the primary reasons behind this is holding too many funds in the investment portfolio. But how many are too many funds in the investment portfolio? Let’s explore that.
It’s standard for individuals to hold numerous similar investments in their portfolio. They do it with the intention of healthy diversification to protect their portfolio from their own risk and ultimately aim to enhance the returns on their investments. However, these investors are unaware that investing in too many mutual funds to diversify can hamper the returns on their investments. This is because the returns on investments tend to dilute when you invest in too many funds of similar nature with similar fundamentals. The profits from exceptionally performing mutual funds tend to compromise against the low-performing mutual funds.
Moreover, every equity fund invests in at least 50 to 60 stocks. So, even if you invest in just 8 to 10 equity funds, you invest in about 400 to 600 stores. Your investment portfolio tends to act like a tracker fund in such scenarios. And as you might know, if you own the entire stock market, it isn’t easy to generate alpha returns. Instead, you can consider investing in index funds. Investing in index funds would help you save money and overcome the shock related to your fund’s performance.
Another problem with holding too many funds in a single investment portfolio is that monitoring is difficult. As it takes more time to manage your investments, you might not review your portfolio even once a year which could be heavily devasting for your portfolio.
So, what’s the maximum amount of funds you must hold in your portfolio?
This may lead you to wonder about the ideal amount of funds an investor must hold in their investment portfolio. An investor cannot fall short of investment options when it comes to equity mutual funds. You can choose from small-cap equity funds, mid-cap equity funds, large-cap equity funds, sector funds, Flexi funds, etc. This may get overwhelming for investors. As a general rule, holding three to four equity funds at any time is advised. Depending on your investment goals, investment horizon, and risk appetite, you can choose mutual funds investment plans that meet your needs. Happy investing!
