How many mutual funds should you have in your portfolio?
Posted by: Arti Bhargava on May 01, 2017, 05.15 PM IST
Richa has been investing in mutual funds for more than a decade, based on her own research. She has put together a portfolio of 10 equity funds, seven debt funds, one liquid fund, one gold fund and two international funds.
Keeping in mind the dangers of putting all eggs in one basket, Richa feels she has considerably reduced the risk element in her portfolio by diversifying.
However, her returns have been mediocre, despite remaining invested for a long time. She wonders if she has gone too far in trying to spread the risk in her portfolio.
Richa's portfolio is a haphazard one comprising all kinds of schemes. Her habit of lapping up anything in the name of diversification will tend to do more harm than good. Diversifying beyond a point actually hurts returns. While she may think that she is playing safe by adding more schemes to her portfolio, this is not always true. After a point, having more funds would not offer any value to her portfolio.
Holding a large number of funds makes it that much more difficult to keep track of all investments and their performance. Also, it may be worth noting that even if there are good schemes in her basket, it may not reflect in the portfolio returns because their contribution will be diluted by too many slackers. Moreover, owning too many mutual funds will not give her the diversification benefit if all the schemes own the same kind of stocks.
Thus, she should own a mix of funds that have exposure to different segments of the equity market. Similarly, she can have exposure to both long and short tenure bond funds. So, how many funds should Richa have in her portfolio? There is no one-size-fits-all answer, but 3-4 diversified equity funds, 1-2 bond funds and a gold fund should be enough to create a well-diversified portfolio. It is time Richa got her portfolio back in shape.
(The content on this page is courtesy Centre for Investment Education and Learning (CIEL).
Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.) This article appeared in Economic Times dated May 01, 2017, 05.15 PM IST