How Many Mutual Funds Should I Have?

How many mutual funds you should have depends mainly on your goals, how much you invest and how much time you want to spend reviewing your portfolio. Owning more funds does not automatically spread your money more widely, because many funds hold the same large companies. What matters is that each fund has a clear job.

The number of funds matters less than what they hold. A few funds with different jobs are easier to understand than a long list of funds that look alike.

Owning more funds can mean owning the same companies

Each equity fund chooses its own mix of companies, but large, widely held companies appear in many of them. Two funds with different names can hold much of the same portfolio. Adding several such funds can feel like diversification while the money stays concentrated in the same businesses.

Overlap limits what extra funds add

The illustration below assumes each fund holds 50 companies, and that the same 30 large companies make up 60% of every fund's money. The other 20 companies in each fund are assumed to be completely different from fund to fund, which is the most favourable case for diversification. Real portfolios differ, and their overlap can be higher or lower.

Illustrative figures at assumed holdings: 50 companies per fund, with 30 shared at 60% of assets.

The first fund adds the most new companies. Each fund after that adds at most 20 new names, because the other 30 are already in the portfolio. Moving from four funds to six adds at most 40 companies to the count, yet the shared 30 still carry 60% of the money.

Six funds that hold mostly the same companies

Suppose you invest ₹6 lakh across six equity funds, with ₹1 lakh in each. Each fund puts 60% of its money in the same 30 large companies. The table shows where the money sits.

Holding two of these funds instead of six would leave that 60% share unchanged. Only the remaining 40% is spread across more companies. Extra funds widen the smaller, specific part of the portfolio, while the largest part stays where it was.

Single company exposure stays the same

Suppose one large company is an 8% holding in each of six funds, with equal money in each fund. The company is still 8% of the whole portfolio. Owning it through six funds does not reduce exposure to that company. It only repeats the same position in several places.

Splitting a monthly SIP across funds

Suppose you run a ₹30,000 monthly SIP. Split equally, it gives ₹5,000 a month to each of six funds, ₹10,000 to each of three funds, or ₹15,000 to each of two funds. The smaller the amount per fund, the harder it is to see whether each fund is doing its job.

A simple structure by goal

Start with the goal rather than the fund count. The table sets out one way to match funds to goals.

Funds that differ by company size are compared in flexi cap and multi cap funds. Matching each fund to a goal is covered in goal-based investing. Keeping the emergency fund apart from investments means a market fall does not force you to sell long-term holdings to pay an urgent bill.

Check overlap before adding a fund

Before adding a fund, compare its largest holdings with those of the funds you already own. If the new fund mostly holds what you already own, it adds paperwork rather than diversification. Fund houses publish each scheme's portfolio, so this comparison takes little effort. If the basics of what a fund holds are new to you, start with what a mutual fund is.

Signs a portfolio holds too many funds

• Several funds in the same category hold similar largest holdings.
• Monthly SIPs are spread so thin that each fund feels too small to track.
• You cannot say in one sentence what each fund is for.
• Reviews take long enough that you put them off.

Factors that set the right number of funds

Four things shape the right number for you: the amount you invest each month, how many distinct goals you have, how much time you want to spend on reviews and how much overlap you are willing to accept. Holding very few funds has its own cost, because more of your money then depends on one fund manager's decisions. Holding more funds than you can track is one of several common mutual fund mistakes.

Frequently asked questions

How many mutual funds should I have if I am starting out?

Starting out, a small number of funds is usually easier to manage than a long list. Begin with one core diversified equity fund that matches your main goal, and add another only when a goal needs its own fund. Check the overlap before each addition.

Does owning more mutual funds reduce risk?

Not by itself. Extra funds reduce risk only when they hold different companies or assets. When several funds hold much the same large companies, a fall in those companies affects all of them, so the portfolio moves in the same direction.

Can two funds from different fund houses overlap?

Yes. Fund houses make their own decisions, but many of them buy the same large, widely held companies. Compare the holdings of the funds, not just their names or the fund houses that run them.

How do I check overlap between my funds?

Look at the holdings list in each fund's published portfolio disclosure or factsheet. Note the largest holdings of each fund and the companies that appear in more than one. The more money the funds have in the same companies, the more closely they are likely to move together.