How many mutual funds should you have in your portfolio? Investing in mutual funds can create huge wealth for an investor, if the schemes are carefully selected. In this video we have explained the reasons why it is important to invest in more than 1 mutual fund to achieve diversification benefits.
To get the benefit of investing across categories, generally an investor should consider investing in some of the prominent categories, such as, large caps, mid caps, small caps and flexi caps. Along with diversification across categories, it is also important to invest in more than 1 AMC or fund house. Each fund house has their own set of skills. Even though investing in more than 1 mutual fund offers diversification benefits to the investor, investing in more than 6 or 7 funds can over-diversify an investors portfolio.
This leads to generating only market returns or below market returns due to a high expense ratio. Investments in active funds should be in the right funds and not in a greater number of funds. Ideally, a portfolio with 3 to 6 funds is easy to track and offers a good risk-return tradeoff.