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How many mutual funds should there be in a best investment portfolio?

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Lalit

It all depends on your needs and category of funds you are buying.

For example if you are looking for alternate to savings bank account - and investing in liquid funds - 2 funds are good enough.

For long term investing in equity funds, 4 to 5 funds are good enough.

Too much diversification does not help - Firstly, it becomes very difficult to keep track of so many funds and secondly, overlap between funds start happening. 

There is no right or wrong - some people remain happy of 1 or 2 funds while others like spreading across multiple of them. 

Ishan

Interesting Question as too few funds can be risk whereas too many funds can be difficult manage and track. About 8 (or +/- 2) mutual funds seem like the ideal number of funds to own. There is nothing wrong if you want to own significantly more or less number of mutual funds than suggested here provided your decision is well informed. Let's start by talking about diversification: You must have heard of diversification. Every investment advisor asks you to diversify your investments to safeguard it from sudden risks. Diversification: how much is too much? The aim of diversification is to spread risk. If you invest too much in one company’s stock, you are at great risk. If something happens to that company, a significant portion of your money could get wiped away. So to mitigate that risk, you buy shares of many companies. But if you invest in too many companies, and one of them does very well, your investment won’t gain much. The company that did well would have caused a very small impact on your total investment. So you should limit yourself to owning a few shares from most industries. Unless you are very well versed with the markets and have expert knowledge about mutual funds, a good rule of thumb would be to own: 1. Large cap mutual funds: Up to 2. Maybe 3 at best. Beyond that, it doesn’t make sense as there will be great overlap in the shares owned by your mutual funds like HDFC Top 200 Mutual Fund 2. Mid cap mutual funds: Up to 2. While you might get higher returns, the risk you expose yourself to is also higher. 3. Small cap mutual funds: Up to 2. Given how high the risk is with these mutual funds, it is best to limit yourself to a limited number of small cap mutual funds. Also, avoid putting in a great percentage of your total mutual fund investment in small cap mutual funds. 4. Debt funds: Ideally 1, but 2 is also good. Most debt mutual funds give you similar returns so it doesn’t make sense for you to own multiple debt mutual funds like https://groww.in/mutual-funds/icici-prudential-flexible-income-plan-regular-growth. 5. Sectoral mutual funds: The number of sector mutual funds you invest in should be the number of industries you have great knowledge about. You should skip investing in these if you don’t have a very good idea of the sector the mutual fund is investing in. Happy Investing! Ishan Bansal

Mutual fund investments are subject to market risks. Please read the scheme information and other related documents carefully before investing.
Past performance is not indicative of future returns. Please consider your specific investment requirements, risk tolerance, investment goal, time frame, risk and reward balance and the cost associated with the investment before choosing a fund, or designing a portfolio that suits your needs.
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