One way to earn returns from the stock market is to invest in shares. The other and less daunting way is to park money in mutual funds, be it equity, debt or hybrid funds, depending on your risk appetite. Statistics produced by the Association of Mutual Funds in India (AMFI) reveal how the Indian mutual fund industry’s average assets under management stood at ₹38.56 trillion. This is a tremendous rise from the humble figure of ₹17.89 trillion as on February 28, 2017.
With investors inclined to earn good returns compared to that offered by bank deposits and other fixed-income instruments, more people are now putting their money in mutual funds. However, the urge to earn more and the inability to gauge which mutual fund portfolio has resulted in many people investing in as many as 50 mutual fund schemes.
Too Much Or Not Too Much?
Deepali Sen, founder partner, Srujan Financial Services LLP (a Mutual Fund Distributor) shared, “Over more than two decades, I have observed that clients have around 13-14 funds on an average in their investment portfolio.” Many mutual fund managers like Sen complain of bloated portfolios that investors mindlessly design without understanding the pros and cons of their decisions.
Sen adds, “The first thought which comes to my mind seeing this is that it is too diversified. Please remember that diversification cuts the risk, but too much diversification cuts the returns too. Risk and returns go hand in hand. A planner must get the fine balance between the two by optimising, minimising risk and maximising returns.”
Small can be good at times
To have a compact portfolio is a blessing in disguise as it involves less paperwork while leaving you with enough time to consider other aspects of your life. Mrin Agarwal, Financial Educator & Director, Finsafe India says, “Including five to six funds in a portfolio is good enough. A combination of index, flexicap and midcap funds along with an equity-linked savings scheme (ELSS) for tax saving is all that a portfolio needs. Having too many funds means over-diversification and doesn’t add to portfolio returns.”
What many investors fail to realize is that investing in two to three selected mutual fund schemes depending on the risk appetite can do the trick. Also, increasing your mutual fund investments by 10-15 per cent every year can help you reach your financial goals.
But Seriously, How Many?
There is no mathematical formula to arrive at the ideal number of mutual funds that you must have. With less knowledge of how the market works, many investors do not realize the importance of consolidation. Different financial planners suggest thresholds by putting money in certain schemes, beyond which they always advise their clients to consolidate.
Depending on your risk appetite or long-term financial goals tied to your various life stages, most investors must consider investing in not more than five equity funds and three debt funds. Apart, some investors tend to be biased against investing beyond a sum in any mutual fund. The fear of losing out on all the money including the capital prompts them to over diversify at times.
Is That Fund a Keeper?
Just because you have put your money in a mutual fund, it does not mean that it is worth keeping. Knowing what to keep and what to sell will iron out the unnecessary creases in your financial plans. You can check if you have enough ELSS funds to help you save on taxes, good funds that earn returns in sync with the market, and some fixed debt funds that continue to earn high returns irrespective of market movement. Obviously, the volatility component cannot be ruled out entirely. However, craving for more mutual funds in your portfolio is sheer madness. Instead, choose some good funds to park your money in.