Investing in multiple mutual fund schemes may appear to be an effective way to diversify a portfolio, but does every investor really need four or five funds? The answer depends on the amount being invested, the investor’s financial goals, the investment horizon and the extent of diversification across schemes, experts told Zee Business.
Kshitiz Mahajan, Managing Partner & CEO, Complete Circle Wealth Solutions and Harshvardhan Roongta, CEO of Roongta Securities, explained how investors can decide the number of schemes in their portfolios. They emphasised that investors should look beyond the number of funds and examine their underlying stock holdings, sector exposure and investment styles.
How many mutual funds should you have in your portfolio?
Mahajan suggested that investors starting their mutual fund journey could consider three to four schemes, depending on their investment amount and portfolio requirements.
“At least four funds, if you are starting,” Mahajan said, recommending that investors compare the top stock holdings of their schemes even when the funds belong to different categories or are managed by different fund houses.
He pointed out that investors may hold flexi-cap, multi-cap, large-and-mid-cap, mid-cap and small-cap funds, yet still end up with significant overlap in their portfolios.
Therefore, investors should check whether different schemes hold the same stocks or have similar sector exposure. Simply investing in funds belonging to different categories does not necessarily mean the portfolio is adequately diversified.
Mahajan also highlighted the importance of investment styles. For instance, a value-oriented fund could complement a portfolio that primarily follows a growth-oriented investment approach.
According to him, investors with smaller investment amounts could start with three to four schemes, while five funds could be considered on the higher side for those looking to build a broader portfolio.
Is one mutual fund enough for a Rs 4,000 monthly SIP?
The number of schemes an investor should hold also depends on how much they invest every month and whether they intend to increase their SIP contributions over time.
Roongta addressed this question with an example of an investor investing Rs 4,000 per month through SIPs.
“I, in fact, say that even if you invest Rs 4,000 in a single scheme, that is also enough,” Roongta said.
He explained that investors have more than one way to structure their portfolios. Someone investing Rs 4,000 monthly could divide the amount across four schemes, investing Rs 1,000 in each, particularly if they plan to increase their SIP contributions in the future.
This approach could help investors establish exposure to different mutual fund categories early and increase their investments in the same schemes as their income grows.
Alternatively, investors could start with one or two schemes and add another fund when they have more money to invest or when their portfolio requirements change.
Roongta said both approaches could work, depending on the investor’s circumstances.
“If you are investing Rs 4,000 across four schemes and you are not going to increase your SIP in the future, then do not take four schemes. One or two schemes at the most are enough,” he explained.
He cautioned investors against creating an unnecessarily complicated portfolio that becomes difficult to manage and monitor.
Why having too many mutual funds can become a burden
Holding several schemes does not automatically translate into better diversification. Investors also need to consider the administrative work involved in maintaining multiple mutual fund investments.
Roongta pointed out that investors may need to update their bank details separately across different mutual fund folios. Similarly, updating nominee details and handling claims can become more cumbersome when investments are spread across numerous schemes.
This is why investors should assess whether each additional fund serves a clear purpose rather than adding schemes simply to increase the number of investments in their portfolios.
A smaller portfolio can be easier to monitor, particularly for investors who are just beginning their mutual fund journey.
3 things to check before choosing multiple mutual funds
Mahajan recommended that investors examine three important aspects when selecting mutual fund schemes.
1) Stock overlap: Compare the top holdings of different schemes to see whether they are invested in the same stocks. Using Excel tools or available AI tools can help the investors compare the stock holdings.
2) Sector overlap: Check if multiple schemes have a significant exposure to the same sectors. Having similar sector allocation across multiple funds can limit the diversification that an investor was hoping to accomplish by spreading out their investments.
3)Investment style: Learn whether the schemes have growth or value orientation. Schemes with different investment styles might provide diversification benefits if the schemes have different holdings and risk profiles.
Investors should also consider the fund category, investment horizon and financial goals before selecting a scheme.
Should you add more funds or increase your existing SIPs?
When planning investments, investors may be under the impression that they need to keep adding to their mutual fund portfolio as and when they want to increase their investments.
For example, investors may start out with a scheme or two when they first make an SIP commitment. Over time, when they are ready to invest in multiple asset classes, they can increase their mutual fund holdings.
It is also important to maintain focus by making sure each scheme has a distinct purpose and that the portfolio remains easily manageable.
Additionally, it is important to remember that it is the quality of mutual fund holdings and not the quantity of mutual fund schemes that makes an investor successful.