But here’s the real question: does owning more schemes really diversify your portfolio — or just make it harder to manage?
Ask if the fund adds value
Before adding another fund, check if it genuinely contributes to your portfolio. Many equity schemes within the same category — say, large-cap — often hold the same top stocks.
“Investors often mistake the number of funds for diversification,” says Nisreen Mamaji, CFP and founder, MoneyWorks Financial Services. “When schemes within the same category hold similar stocks, you’re not spreading risk — you’re duplicating exposure. It’s better to own a few schemes that complement each other than to clutter your portfolio with overlapping folios.”
Mamaji adds that most investors can achieve broad exposure with a handful of funds covering large-, mid-, and small-cap categories, plus an international fund.
Over-diversification, warns Nishant Agarwal, managing partner and head–family office at ASK Wealth Advisors, can blunt returns.
“Over-diversifying can be counter-productive. Having multiple equity funds may lead to a situation wherein your portfolio mirrors the market itself. So, your portfolio is less likely to outperform benchmark indices,” he says.
Keep it simple
Financial planners often recommend a structured approach.
“Depending on whether your objectives are short-, medium-, or long-term, about 8–10 well-chosen schemes are usually adequate,” said Mamaji.
The mix can include equity funds for long-term goals and debt funds for stability and short-term goals. Hybrid funds can be used for medium-term goals as these usually offer equity:debt mix, to balance growth and stability. The key is to align each investment with a specific goal and time horizon.
Multi-asset funds, for instance, also offer exposure to gold, adding another layer of diversification.
Build a strong core
Rather than chasing every mutual fund category, focus on the ones that truly anchor your portfolio. Think of these funds as your lead cast, with others playing supporting roles.
If you prefer actively-managed funds, start with flexicap funds. These give fund managers freedom to shift allocations across large-, mid-, and small-caps depending on market conditions — so you don’t need to time or tweak market-cap exposure yourself.
For those who want fixed exposure to different market caps, multi-cap funds fit the bill. These must allocate at least 25% each to large-, mid-, and small-cap stocks, leaving 25% flexible. However, such pre-set exposure can make them more volatile during market swings.
On the hybrid side, consider balanced advantage funds or multi-asset funds — both are suited for your long-term, core portfolio. These work well for large-ticket goals like retirement or buying a house, which will require longer investment horizons to accumulate.
Smart diversification
Diversification isn’t just about adding more funds — it’s about adding variety of style.
“One smart way to diversify mutual funds is by investing in funds managed with contrasting investing styles. For example, in the same category, investor can consider fund sticking to growth investing style and one with value investing style,” says Deepak Chhabria, CEO and director, Axiom Financial Services.
To understand a fund manager’s approach, review the fund’s factsheets and commentaries — they often reveal investment style and conviction. Combining funds with different approaches helps smoothen returns across cycles.
Adding an international fund can further expand your portfolio’s horizon. Historical data supports this: a study by S&P Dow Jones Indices found that a portfolio combining the US’s S&P 500 and India’s S&P BSE Sensex delivered better long-term results than either alone — especially when regularly rebalanced.
Diversification doesn’t stop with mutual fund categories. Allocating across asset classes — equities, debt, gold, and cash equivalents — can protect your portfolio from market shocks.
For instance, during global crises, investors often move from equities to gold, pushing its price up even as stocks fall. Exposure to such varied assets cushions losses and keeps portfolios steady through economic turbulence.
Avoid thematic distractions
While sectoral and thematic funds — such as technology, infrastructure, or climate-focused ones — may look tempting, experts advise limiting them to the periphery of your portfolio.
“Sector or thematic funds are high-risk, high-reward bets,” says Mamaji. “They can be volatile and aren’t suitable for goal-based investing.”
If you wish to experiment, allocate only small amounts from bonuses or surplus cash. Your core portfolio should stay grounded in diversified equity, hybrid, and debt schemes aligned to your goals and risk tolerance.
Bottomline
Owning more funds doesn’t mean you’re better diversified — it could simply mean more clutter.
Stick to 8–10 thoughtfully chosen schemes that cover key asset classes, styles, and geographies.
When it comes to mutual funds, less — but smarter — is more.