The idea behind putting money in mutual funds is to earn returns that mar inflation. With the internal rate of return (IRR) of various financial instruments, including government-sponsored schemes, not exceeding inflation, allocating money to mutual funds has become necessary. The market-linked returns from some of these funds have helped many create a well-meant corpus for the future.
Wealth generation takes time, which is why many investors tend to put their earnings into multiple mutual funds. Many investors have even invested in more than a dozen funds without realizing how the portfolios of many of these funds may be overlapping.
Viral Bhatt, Founder, Money Mantra, says, “Investing in too many mutual funds can lead to duplication of holdings, where you end up owning the same stocks or assets in multiple funds. This can lead to inefficient use of capital and can reduce the potential benefits of diversification.”
More funds do not mean higher returns
The yearning to earn more within a short period has caused many to be convinced that investing in just one or a handful funds may not be enough.
Some investors cite portfolio diversification as one of the reasons behind such inane ideas to invest in so many funds simultaneously. Diversification does not really help or offers very little protection during market downturns as in the case of the recent Covid-19 pandemic or the continued bear run of the market due to escalating geopolitical tensions and fear of inflation.
Bhatt advised, “Investing in too many mutual funds can lead to over-diversification, which can actually reduce the potential returns of your investment portfolio. Diversification is important to manage risk, but when you have too many funds, it can lead to a dilution of returns.”
Do these investors understand the meaning of “Diversification”? The answer is “Possibly No”. Many of these investors judge the portfolios of these funds based on their names alone.
D Muthukrishnan, a Chennai-based certified financial planner, explained, “There should not be more than three funds each in the required category. For example, suppose someone wants to invest in both equity and liquid funds. Irrespective of the size of the portfolio, three flexicap and three liquid funds are good enough. Mutual funds themselves diversify. So, there is no need for too much diversification in mutual funds, too.”
Apart, most investors do not go through the pain of comparing the recent portfolio of stock purchases by these fund houses. The emphasis on past-year returns is another reason for some of these investors to stock up so many funds in their investment portfolios.
How many funds are appropriate?
There is no ideal number that one may dictate when it comes to deciding how many mutual funds one may invest in. A lot depends on how one perceives mutual funds and their allocation to one’s overall investment strategy.
Dev Ashish, a SEBI-Registered Investment Advisor and Founder (Stable Investor), said, “Diversification is important but it is not about having as many funds as possible. In fact, beyond a point, no additional diversification benefits are available even if you invest in more funds. Most investors’ needs can be sufficiently handled with a small number of funds from different categories. In general, having one to two schemes in chosen fund category would be sufficient. That is, assuming the investor doesn’t have too many fund categories in a portfolio.”
Suresh Sadagopan, MD & Principal Officer, Ladder7 Wealth Planners, said, “In general, six to nine funds should be fine for an overall portfolio (of up to ₹1 crore) of equity, debt, gold, and others. One may go for some more funds if it is a much larger portfolio.”
Having too many mutual funds will do more harm than good. Apart from the fact that numerous mutual funds do not add to the benefits, they actually derail you from the idea and logic behind investing in them. Having too many funds in one’s investment portfolio makes it immensely difficult to track and assess the progress of each of these funds and then decide between performing and non-performing mutual funds. Simultaneously, investing in all of them for a prolonged period also means that you have been investing in laggards too for far too long.
Citing the disadvantages of buying too many mutual funds, Bhatt summarises, “Investing in too many mutual funds can be inefficient, costly, and counterproductive, and it is generally recommended to keep your portfolio simple and well-diversified.”
Investing in at least one mutual fund and continuing to stick to it for more than a decade is necessary to earn a decent corpus. However, the choice of fund between equities, hybrid, and debt funds depends on your outlook, risk appetite, and your preference for these funds.
