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 an amazing tool to diversify your investment portfolio. Depending on your investment needs, they can either help you to create wealth or preserve your capital. They are an ideal investment option to cater to your investment needs – be it short-term or long-term investment goals.
However, there are times when an investor is unable to 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 quite common for individuals to hold numerous similar types of investments in their investment portfolio. They do it with the intention of healthy diversification to protect their portfolio from the down risk and ultimately aim to enhance the returns on their investments. However, these investors are unaware of the fact that by investing in too many mutual funds with the aim of diversification can actually 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. What’s more, every equity fund invests in around at least 50 to 60 stocks. So, even if you invest in just 8 to 10 equity funds, you end up investing in around 400 to 600 stocks. In such scenarios, your investment portfolio tends to act like a tracker fund. And as you might know if you own the entire stock market, it is difficult to generate alpha returns. Instead, you can consider investing in index funds. Investing in index funds would not only help you to save money but also aid in getting over the shock related to your fund’s performance.
Another problem with holding too many funds in a single investment portfolio is that it becomes difficult to monitor. As it ends up taking more of your time to manage your investments, you might end up not reviewing your portfolio even once a year which could be heavily devasting for your portfolio.
So, what’s the maximum amount of funds that you must hold in your portfolio?
This may lead you to wonder about the ideal amount of funds that an investor must hold in their investment portfolio. When it comes to equity mutual funds, an investor cannot fall short of investment options. You can choose from small-cap equity funds or mid-cap equity funds or large-cap equity funds or sector funds or flexi funds, etc. This may get overwhelming for investors. As a general rule, it is advised that to hold three to four equity funds at any point of time. Depending on your investment goals, investment horizon, and risk appetite, you can choose mutual funds investment plans that meet your needs. Happy investing!