How Many Mutual Fund Schemes Should You Invest In? Less is More!

In today’s world of information overload, it’s easy to assume that more is always better. More mutual fund schemes = better diversification = higher returns, right?

Wrong.

When it comes to mutual fund investing, diversification is important—but over-diversification can be counterproductive. Let’s dive into this often misunderstood topic and find out the optimal number of mutual funds you should ideally hold.

🎯 Why Do People Invest in Too Many Mutual Funds?

There are 3 common reasons:

• Fear of Missing Out (FOMO): Every time a new fund performs well, many investors rush to add it to their portfolio.
• Misunderstanding Diversification: People confuse “diversifying across asset classes” with “buying too many funds in the same category.”
• Lack of Review: Old SIPs continue while new ones keep getting added—resulting in duplication and clutter.

🧠 What is True Diversification?

True diversification means:

• Investing across different asset classes (equity, debt, gold)
• Within equity: diversifying across market caps (large-cap, mid-cap, small-cap)
• And exposure to different investment styles (growth, value, blend)

Holding multiple funds from the same category (e.g., 5 large-cap funds) doesn’t give you real diversification—it gives you repetition.

📉 Why Over-Diversification is a Problem

• Reduces Returns: Overlapping holdings mean you're essentially holding the same stocks via different funds.
• Complicates Monitoring: It becomes hard to track, compare, or review performance effectively.
• Tax Confusion: Managing redemptions, capital gains, and exit loads gets complex.
• Dilution of Gains: If one fund performs exceptionally, its impact is reduced across too many schemes.

✅ So, What’s the Ideal Number?

Here’s a simple guideline:

Investment Type Ideal No. of Funds Equity Funds 2 to 4 (across categories) Debt Funds 1 to 2 (based on goals) Hybrid / ELSS Optional, 1 if needed

🔹 Beginners: Start with 1-2 diversified funds (like a flexi-cap + ELSS) 🔹 Advanced Investors: May add sectoral/thematic funds—but with clear purpose

💡 Rule of Thumb: “Each fund in your portfolio should have a unique role.”

📌 How to Clean Up an Overloaded Portfolio

If you already hold 8-10 schemes:

• Identify overlap using portfolio analysis tools (like Value Research, Morningstar)
• Exit non-performing or duplicate funds gradually (consider tax implications)
• Consolidate into high-quality, low-cost, consistent performers

🧾 Real-Life Example

Let’s say you hold:

• 3 large-cap funds
• 2 flexi-cap funds
• 1 mid-cap
• 2 ELSS funds
• 1 international fund

Problem? The large- and flexi-cap funds may already have 60–70% overlap in top holdings. Better Approach? Choose 1 large-cap, 1 flexi-cap, and maybe 1 international for exposure.

💬 Final Thoughts

Investing should be simple and purposeful. You don’t need 10 mutual funds to build wealth. You need 3–4 well-chosen funds aligned with your goals, risk appetite, and time horizon.

🚫 Don’t chase every trending scheme. ✅ Stick to quality, review annually, and invest with clarity.

💡 Remember:

“Your portfolio is like your team. Don’t fill it with players who all play the same role.”

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