Too many funds can spoil your investment party

People invest in mutual funds to earn good returns so that they can combat inflation and build a substantial amount of money. Mutual funds are becoming increasingly popular because the returns or interest rates offered in various financial instruments are not significantly higher than inflation.

On the other hand, mutual funds associated with the stock market provide excellent returns. Many people have been able to create substantial funds or portfolios through them. The trust in mutual funds has increased to such an extent that some people blindly invest in them without hesitation, and several schemes are included in many people’s portfolios.

Financial experts believe that it is not a good practice. It has several disadvantages, and it is not advisable to have too many schemes in anyone’s portfolio.

Now you might wonder how having too many funds can be detrimental?

Too many schemes
In reality, if you invest in too many mutual funds, it is possible that your investment ends up being concentrated in the same type of shares or assets, which is called duplication of holdings. This is because multiple funds can invest in the same type of assets.

For example, if you have invested in four schemes, and all four have invested in the same share index that provides a 10% return, then even if you distribute your money across the four schemes, you will still receive an average return of 10%. However, if you had invested in just two funds with the same investment, you would still receive a 10% return.

This way, diversification in investments does not provide any additional benefit, and the investment is not utilized correctly.

An investor invests in different schemes for diversification and higher returns.

Diversify risk
Diversification is necessary to reduce risk. However, financial experts argue that over-diversification, which means excessive diversification beyond necessity, can potentially lower the expected returns of your investment portfolio.

The problem arises when there are too many funds of the same nature and objective, as some funds perform well while others underperform. The profit of the portfolio gets diluted in comparison to the funds with lower returns, making it challenging to achieve good overall returns in the entire portfolio.

Monitoring such portfolios also becomes difficult. Having a large number of funds, especially with assets that perform poorly, makes it time-consuming to evaluate the performance of such portfolios, and it becomes a challenging task.

Having too many mutual funds in your portfolio may not necessarily improve your returns; in fact, it can potentially lower your returns and sometimes even yield lower returns than inflation.

Ideal number
Now, you might be wondering how many schemes or funds should be considered ideal. The answer is that there is no fixed number of funds that you should have or shouldn’t have. It should be a reasonable number. There is no need for excessive number of schemes. Even investing in a few mutual funds can increase the diversification of your portfolio, which can improve risk management and help you create wealth effectively.

According to experts, ideally, any portfolio should have around 8 to 9 schemes. These may include 2 schemes for short-term needs, 2 schemes for medium-term needs, and 4-5 schemes for long-term needs.

For medium-term needs, hybrid funds are commonly chosen. For long-term needs, the choice of equity or hybrid funds depends on your risk-taking ability.

So  what strategy should be adopted for investing in mutual funds?

Goal-based investing
The most important strategy is goal-based investing. Determine the appropriate investment approach for each of your goals and set a time limit to achieve those goals. This is crucial for effective money management.

By following a goal-based investment approach, you can select some good funds from the vast universe of mutual funds and achieve your financial objectives.

Based on your goals and time horizon, explore various investment options such as equity funds, index funds, and ETFs. Investing in select funds like these will enrich your portfolio. It will be better than investing in multiple funds that are similar in nature.
If you are new to the world of investing and want to play it safe, create a perfect combination of funds that provides you with a sense of security and a healthy balance.

Consider your risk tolerance, financial goals, and whether you prefer passive or active management. Based on this information, choose your options.

Hemant Rustagi, the CEO of Wiseinvest, suggests that the problem of investing in too many mutual funds can be resolved by following a goal-based investment strategy. When you adopt a goal-based approach in mutual funds, monitoring the funds becomes easier.

For example, if someone is a conservative investor who wants to build good wealth in the long term without excessive risk and volatility, they should invest in large-cap mutual funds. If an investor wants to take a moderate level of risk, they can choose flexi-cap funds. If they want to invest a small amount, one or two schemes are sufficient.