Learn How many Mutual Fund Schemes to have in your Portfolio

By Taxscan Team - On May 21, 2021 2:26 pm

A Sanskrit saying goes like this: ati sarvatra varjayate. (excess of anything should be forsaken). The same applies to mutual funds also.

This article will share the downside of investing in too many mutual fund schemes and how to create a focused mutual fund portfolio.

Purpose of investing in mutual funds

As they say, the magic lies in the fundamentals. Before we move ahead on the subject, we need to understand why we invest in mutual funds. And the answer is diversification. Diversifying your investment across securities and asset classes help to lower the risk of your portfolio as a whole.

This means that some stocks will go up in a given market, and some will come down. And this will help you earn a stable average return from your portfolio. This is a much better strategy than always in a roller coaster ride, swinging between safety and returns.

When you invest in a single mutual fund, realize that you are already diversifying your money. So, any further diversification by adding a new scheme should be for the right reasons.

Why people end up investing in too many MF schemes

Too many schemes can mess up your financial life. And it generally happens due to the following reasons:

Lack of proper knowledge of mutual fund selection can cause a lack of conviction in your fund choices. You may feel that at least some good-performing schemes will offset the loss in other schemes.
The ill-assumption that investing in all top-rated funds available in the market will guarantee that the portfolio as a whole will perform better.
Giving in to marketing gimmicks and buying every new fund offer that comes across (NFO)

Side effects of having too many funds in your portfolio

Following are the side effects of having too many funds in your portfolio:

Over time, the low-performing funds will bring down the returns of your entire portfolio
You can face difficulty in managing the portfolio – this can also result in low-performing funds sitting for long periods in your portfolio and draining the returns
Moving out of schemes can cause avoidable tax implications
Consolidating the portfolio at a later date can be too much of a pain and make you procrastinate – also, doing so can cause unnecessary tax implications

So, how many schemes should you have in your mutual fund portfolio

There is no single answer to this question. It depends on multiple factors such as the following:

The stage you are in your financial journey at this moment
The nature of your financial goals
Your preferred asset allocation
How much money you plan to invest or your total investment in mutual funds

Suppose you are a beginner investor and want to start by investing, say, INR 5.000 per month. In that case, you can start a SIP in, say, 2 large-cap mutual funds, or you can have combinations such as one large-cap and one index fund or one large-cap and one ELSS fund and so on.

And then, as your savings and wealth grow even further and you start doing goal-based financial planning, you need to further refine your approach. It is here that hiring a financial adviser makes sense. You can add an international fund to diversify the geographical risk.

Overall, if you are a middle-class family with a reasonable investment corpus, around six to eight schemes can suffice all your requirements.

Some additional tips for young investors

Instead of blindly adding schemes, try to diversify between various investment styles and strategies (e.g., growth/value, large-cap/multi-cap), keeping in mind your financial goals
Diversify across stocks but also diversify between asset classes.
Stay away from New Fund Offers. If your adviser asks you to buy a new scheme, ask him how the new fund fits your overall portfolio and replace which existing scheme. If your adviser cannot give a convincing answer, don’t proceed.

Conclusion

In life, they say, keep it simple. How true! As an investor, you should first learn how to select suitable mutual fund schemes. Then, you should follow a focused approach while adding schemes to the portfolio, keeping your financial requirements in mind. A small and focused portfolio will help you earn better returns over the long term and, more importantly, come with much less hassle.

Sujit Bangar is the Founder of FinBingo.com.

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