How many mutual funds should one have in the portfolio?

It’s an interesting topic to discuss on how many mutual funds one should have in his/her portfolio. While some experts believe having 4 to 5 funds are enough. Some say 10 to 15, and few even say that it is ok to have 20 to 25 mutual funds in portfolio. All the experts have their own analysis to explain on the reason for number of funds to be held.

Let’s understand few points before concluding how many funds one should have in his/her portfolio:

  1. India is a developing economy, and is expected to develop at a fast pace in the coming decade. To get benefit of this fast pace of development, it is required to invest in small and mid cap companies. There are many sectors wherein large cap companies are limited, and these sectors have presence mostly in small and mid cap companies. This is one more reason to invest in small and mid cap companies.
  2. Large cap funds should not be ignored as these funds provide stability to the portfolio.
  3. In any market, not all the sectors do well all the time. At a given point of time, some sectors are exceptional performers, some are mediocre performers and some do not do well. A fund doing sector rotation is good to have in the portfolio.
  4. It’s good to be invested with 2 AMCs in each mutual fund category considered for investment to reduce AMC risk.

Considering the points above, a portfolio can be created with below combination of mutual funds:

  1. Two small cap funds which is aggressive investment for high risk and high return expectation.
  2. Two mid cap funds for good return and less risk as compared to small cap funds.
  3. Two flexi cap funds as these funds have flexibility to switch money between different market caps. Fund manager has the flexibility to increase investment in large cap funds for stability as and when needed.
  4. One or two ELSS fund in case it is required to get tax benefit in section 80C.
  5. One or two business cycle funds as these funds rotate money between sectors to generate good returns.

So, with the 5 points above, having 7-10 mutual funds in portfolio provides good diversification.

Please note that in this blog we have discussed about equity mutual funds. In case it is required to invest in debt fund as per investment need, it is not covered in the blog, and debt fund investments can be done apart from the funds we discussed in the blog. One more point to mention is that we have discussed only about actively managed funds in this blog. We will have a separate blog to discuss on Active vs Passive funds.

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