How Many Mutual Funds Should You Invest In?

The most worldwide question that new investors (or plane existing investors) want an wordplay to is “How many bilateral funds should I have in my portfolio?” The very number is probably very variegated from what you think.

Before coming to the answer, let us understand the reason overdue this ravages – Investors want to have a properly diversified portfolio. Diversification is the main objective here. Therefore it is important that we should write this diversification issue.

The famous saying “Don’t put all your eggs in one basket” is the essence of diversification. Mainly, it ways not limiting your investment to a single thoroughfare but spreading it wideness variegated areas in order to mitigate risk. If you limit your investment to one visitor stock you are at the highest risk. What if the visitor gets involved in a major scandal tomorrow? Its stock price would tumble & you would lose all your money! So to stave such risk you invest in many variegated companies and to mitigate risk remoter you invest in companies from variegated sectors as well. Plane if one sector or industry is going through a unrewarding phase, other largest performing sector might help and imbricate those losses. Therefore, the weightier strategy here would be to diversify your investment by owning few shares from all sectors.

While the whilom logic is well and good for uncontrived probity investing, it causes problems when you wield the same logic to your bilateral fund investment. The biggest and the most worldwide mistake most investors succumb to is thinking that they are properly diversified by spreading their investment money in many variegated bilateral funds.

You need to understand the fact that probity bilateral funds themselves invest in shares from very diverse industries. A single probity bilateral fund portfolio on an stereotype consists of shares from virtually 40 – 60 companies at any given point. So when you invest in an probity bilateral fund you are indirectly investing in shares of that many companies, hence your portfolio is once very diversified. In fact one of the main advantages of investing in bilateral funds is the quality of diversification that they provide to your investments. The fund managers often opt for a well diversified portfolio by investing in multiple avenues. They invest not just wideness variegated companies but moreover variegated sectors and size of companies.

Investing in too many funds will not provide the desired diversification, considering stocks or underlying holdings in many of such funds tend to be similar or overlapped, which ways that you end up placing your money in same companies then & again. Buying bilateral funds from the same category will have you investing in similar/same set of companies over & over. For investor of bilateral funds the main diversification required is between variegated fund managers.

When you have too many bilateral funds, you can hands lose sight of the forest for the trees. It is difficult to maintain a huge portfolio and alimony track of all the investments. You will goof to notice a major shift in fundamentals of one or increasingly funds, which can rationalization you dearly. Also, when you start investing in many variegated funds in the name of diversification, you start behaving like a collector instead of an investor with specified goals. It is vital to know how much is enough.

There are no “right” number of bilateral funds for your portfolio, it would depend on your investment goals, risk appetite and time horizon. But it’s easy unbearable to say that you don’t need dozens of funds in your portfolio.

A model portfolio for a investor looking for wealth megacosm with long term horizon and good risk want can be:

• 2 large cap funds (limited number of large-cap companies, chances of overlapping is high)
• 2 – 3 mid cap funds (too many mid-cap companies, chances of overlapping is low)
• 2 – 3 two small cap funds (too many small-cap companies chances of overlapping is low).
• 1 or 2 well-turned or debt funds as a cushion

Or you can invest in 4 – 5 diversified probity funds instead of selecting large, mid and small cap funds separately. You would victorious at the same level of diversification in either way, provided you alimony in mind to stave major overlapping of holdings.

Keep in mind that this number of funds in your portfolio does not include pass through funds that you use as vehicle for STP, as it will be of zero value in future.

If you go for increasingly funds than required it is likely that you would end up having many funds that are practically doing the same thing.

If you own a scattered portfolio take these steps and consolidate your investments to a limited number of funds. This will definitely help you in the long run.

1. First consider your objective: if wealth megacosm is your main goal then investing in debt funds only is the wrong strategy, similarly if you are looking for wanted protection or preservation then a small or mid cap fund is not needed.
2. Once you have finalized the mix of funds that you wish to invest in, find out their underlying holdings. If two or increasingly of your selected funds have significant overlapping, eliminate some of those funds. There is no point in having multiple funds with the same underlying holdings – that is not diversification, that’s duplication!
3. For eliminating you can consider two factors: first the performance, alimony the largest performing fund and discard the other. Secondly squint at the expense ratio, if two funds have similar holdings opt for the lower expense ratio. After all, a penny saved is penny earned.
4. Another important thing to alimony in mind is that you should not limit yourself to one Asset Management Visitor only, invest in funds from variegated fund houses to mitigate the risk, some fund houses have an expertise in investing in one sector while others are the experts of flipside sector.