As an investor, you would have discussed this question a lot among your family and friends: How many mutual funds should you have in your portfolio? Mutual funds sahi hai, we all know that. But how many are right, 2, 3, 10, in this blog, we will answer this question.
Disclaimer: The investments or trades mentioned in this article are solely for educational purposes and should not be considered as personalized financial trading, or investment advice. The purpose of this article is to provide educational information and not to provide advice based on your individual circumstances. It is recommended that you consult with a qualified financial advisor to discuss your specific requirements and situation. Full disclosures here .
Mutual funds are meant for individual investors and many times they are designed and styled and packaged as a consumer product. It's sold as a story and investors get carried away by that they end up buying one thing or the other and they end up being a collector rather than a focused investor.
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Starting your investment journey
If you are starting your investment journey with a small amount, such as 500 rupees, investing in one fund is sufficient. As your investment scale grows, you can consider adding more funds.
- For amounts between Rs. 500 and Rs. 5,000, starting with one fund for SIPs is reasonable.
- If your SIP amount is higher, spreading it over 2-4 funds can be considered. When you have accumulated enough funds, it is important to spread your investments to reduce the risk of poor performance from a single fund manager.
- Once your accumulation reaches a substantial level, typically equivalent to 2-3 years' worth of investment savings, it is advisable to spread it across 2-3 fund managers.
This diversification helps mitigate concentration risk. Now there's no one golden number that there are 5 mutual funds right for all investors. It actually depends on the investor to investor, depending on their financial goals. From your financial goals, your time horizon of investment and risk profile are determined. These factors determine how many mutual funds should be there in your portfolio.
The time horizon of investing can be
Short term- 1 to 2 years
Medium term- 2 to 5 years
Long term- more than 5 years
So depending on the time duration of investing, what type of mutual fund you are investing in changes.
For the short to medium term, you should invest in mostly debt mutual funds.
For the medium to long term, you should invest in mostly equity mutual funds.
Hence depending on your financial goal, the type and number of mutual funds are determined. This is what is standard, but your personal preferences also matter.
If you want to take less risk for the long term and want to invest in large-cap mutual funds, then your portfolio may have 1-2 equity mutual funds.
But if you are aggressive, then you would invest in small cap and large-cap funds.
But if you are balanced then you would invest in 1 multi-cap, 1 in large-cap and the other in a mid-cap mutual fund.
As per your personal risk preferences, the number of mutual funds will change.
Collector mentality - More isn’t always good
However, it is important to avoid becoming a collector and having too many funds in your portfolio. We often observe this issue on the Wright Research portfolio tracker. Having numerous funds can lead to buying funds without a clear purpose, such as tax-saving funds, thematic funds, or sectoral funds. Keeping the portfolio straightforward and focused is essential. Even for a sophisticated portfolio, having no more than 4-8 funds should suffice.
Having too many funds can be problematic for several reasons.
Thoughtful activity: Firstly, investing should be a thoughtful activity, and you should understand why you are buying a particular fund and what your investment goals are. Equity funds require a long-term holding period, so it is important to approach investing with a clear strategy.
Storytelling: Secondly, be cautious of casual storytelling or investing based on short-term trends. Mutual funds often come with attractive stories and promises for the upcoming season, but investments should be made with long-term goals in mind, such as retirement or a child's education. Being thoughtful and serious about your investment decisions is crucial.
Diworsification: Furthermore, excessive diversification can lead to diworsification instead of true diversification. Holding too many funds without a plan incurs the cost of active management, whereas a simple index fund can provide similar diversification at a much lower cost. Index funds typically have expenses of around 0.25-0.5%, while actively managed funds can cost 1.25-2.5%. Owning multiple funds that replicate the market without a clear strategy can be counterproductive.
In summary, it is important to strike the right balance between diversification and concentration in your portfolio. Starting with one fund is suitable for smaller investments, and as your funds accumulate, spreading them across a few carefully chosen funds can help reduce risk. Avoid becoming a collector and focus on a thoughtful approach to investing while considering the benefits of cost-effective index funds.
Optimizing Returns through Portfolio Re-organization
When considering your investment goals, it's important to evaluate when you are likely to need the money. This assessment should be done annually. Determine if your goal is five years away or ten years away, and based on that, decide on your allocation strategy. If you have accumulated a substantial sum over five to ten years of investing and it has become meaningful, identify the best funds and the most diversified vehicles.
A recommended approach is to select four of your best-performing diversified equity investments and consolidate your investments into those funds. Start by divesting from funds where your investment is less than five percent, as they have a nominal impact.
Another starting point could be funds with one or two-star ratings, as these ratings indicate inconsistent performance over time. While it's not to say that five-star or four-star funds are necessarily great, one-star and two-star funds are generally not favourable.
Once you consolidate your sizable investments into three or four funds, you will naturally become more interested in tracking their performance. Your long-term experience with these funds will also shape you as a long-term investor, providing an understanding of how funds can recover from setbacks.
Identifying Underperforming Funds for consolidation
If any Mutual Fund held for around 2 yrs is performing less than the index, and this can be Nifty 50 let's say, then you should quit that fund. Because you would've earned more if you simply invested in the index. You are better off selling it, and making your money elsewhere.
When identifying underperforming funds, don't rely solely on your personal performance. Consider the fund's performance throughout a full market cycle, including rising and falling market phases.
Look for funds that have achieved returns close to five to ten percent, plus or minus, compared to their category. You can use Wright Research’s Portfolio review tool to identify returns, and find underperforming funds. A fund meeting these criteria can be considered reasonable.
Maintain objectivity with your analysis and avoid being swayed solely by short-term performance. It's common for investments to experience temporary downturns, and hastily exiting a fund may not be a wise decision.
Wright Portfolio Review Tool
We have a live portfolio tracker tool that tracks equity, mutual fund and other investments. Remember, trimming your portfolio is a necessary practice, and our tool helps you identify poor performance and over allocation on specific sectors or investments, helping you make the best decisions for your financial future.
Use the Wright Portfolio Review Tool to review your portfolio now.
Asset allocation & rebalancing
It becomes crucial when your accumulation starts to have significant value, such as when it reaches a substantial amount like five lakh or ten lakh rupees. During the initial years, when starting with smaller amounts like 5000 or 10,000 rupees, asset allocation is not a major concern.
Asset allocation serves as a risk moderation mechanism for your portfolio. Once your investments have accumulated to a sizable amount, experiencing a 10% to 20% decline in a short period can have a significant psychological impact. This is when you need to plan your asset allocation more carefully, particularly if your goal is many years away.
If you have a long time horizon and do not anticipate needing the invested money for many years, a substantial portion of your portfolio should be allocated to equities. It is challenging to provide an exact formula or rule of thumb, but a general guideline would be to allocate around one-fourth or one-third of your portfolio to fixed income if you are more conservative.
Benefits of Fixed Income Allocation
Having a fixed income allocation in a long-term portfolio offers two advantages. Firstly, during market downturns, the overall value of your investments does not decline as rapidly as equities. Secondly, when there is a significant decline in equities, having 25% or 35% of your portfolio allocated to fixed income allows for rebalancing. This means you can buy equities at lower prices, taking advantage of the market decline.
In terms of portfolio allocation, if you are in the accumulation phase, a nominal allocation of 25% or 35% to fixed income is suggested. However, if you have entered retirement and rely on your investments for income, a substantial portion should be allocated to fixed income based on your income requirements. Including equity in retirement is crucial for inflation protection, as an all-fixed-income approach may not provide sufficient growth over time.
Importance of Regular rebalancing along with portfolio growth & risk
Asset allocation is one aspect, but to benefit from it, regular rebalancing is necessary. Setting up alerts and revisiting your asset allocation annually is recommended. If there is more than a 10% change in your stated asset allocation, consider rebalancing. Keep a record of your desired allocation, such as 50-50 or 75-25, and make adjustments if needed.
It's important to note that in the short run, you may sometimes regret rebalancing decisions due to market movements. However, asset allocation and rebalancing are not only about maximizing profits but also about mitigating risks. By rebalancing, you are protecting your portfolio against market calamities while aiming to benefit from temporary market declines.
Wright Mutual Fund Platform
We have recently launched our Mutual Fund Platform , where our investment experts select different mutual funds based on deep analysis, reviewing market trends, and implementing AI to identify best performing mutual funds. We have created 5 baskets catering to different risk preferences. Each of these baskets invests in 6-8 mutual funds. And what’s more we rebalance every 6 months, to keep costs low and ensure optimal performance for the portfolio. So if you are looking to invest or want to know more about it, then visit our mutual funds portfolio page .
Disclaimer: Investments or trades mentioned in this article are solely for educational purposes and should not be considered as personalized financial trading, or investment advice. The purpose of this article is to provide educational information and not to provide advice based on your individual circumstances. It is recommended that you consult with a qualified financial advisor to discuss your specific requirements and situation. All investments are subject to market risks. Please read all scheme related documents carefully before investing. Past performance is not an indicator of future returns. Full disclosures here .