How many mutual funds should you own in your portfolio?
“You know, we think diversification is—as practiced generally—makes very little sense for anyone that knows what they’re doing…it is a protection against ignorance.”
The rise in mutual fund folios in the last five years to 241.3 million (m) as of June 2025 – of which nearly 190.7 m are retail investors plus high net worth individuals (HNIs) – shows a large number of investors are banking on them for wealth creation.
The asset under management (AUM) of the Indian mutual fund industry today is Rs 74.41 trillion.
The Indian mutual fund industry is witnessing a dynamic phase, and there is a wide range of schemes out there to invest in. Fund houses are also coming up with new fund offers (NFO), luring investors with the Rs 10 NAV proposition.
However, the key question is: How many mutual funds should you invest in?
Sadly, many investors fall into the trap of holding too many mutual fund schemes in their portfolio, believing that they are diversifying.
But they end up over-diversifying and over-crowding the portfolio.
While diversification is the basic tenet of investing, excessive diversification can potentially dilute portfolio returns.
There could also be an unintentional mutual fund overlap, which could prove counterproductive. This happens when you hold two or more schemes that are investing in similar underlying securities.
If the overlap is high, it defeats the purpose of diversification and leads to portfolio concentration risk and returns skewed towards a few stocks, sectors, particular market caps, or investment styles.
Beyond a point, every mutual fund scheme you add to your investment portfolio just occupies additional space, offers no extra benefit, increases the burden of monitoring a large portfolio, and does not necessarily lower the risk.
To avoid a mutual fund overlap and overdiversification, it is important to add schemes that are unique and only the ones that align well with your risk profile, investment objective, financial goals, and the time at hand to achieve those goals.
Stay away from investing in schemes in an ad hoc manner just because your next-door neighbour, friend, relative, colleague or agent is suggesting it.
Don’t be tempted by NFOs or an existing scheme’s historical returns. Keep in mind that past returns are in no way indicative of future returns.
A mutual fund already offers the benefit of diversification. So, as long as you invest in worthy and most suitable ones, you ideally don’t need many schemes.
Number of Equity Funds
A rational number would be no more than 5 to 7 unique schemes.
Following a core and satellite approach, you need one of the best large cap funds, a flexi-cap fund/multi-cap fund, a value fund, and a contra fund as part of the core portfolio, comprising 65-70% of the overall equity fund portfolio.
In the satellite portion, comprising up to 30-35% of the equity portion, you may consider an aggressive hybrid fund, and a mid-cap fund.
And if you have a very high-risk appetite, consider a small-cap fund.
The overall investment horizon for the core and satellite equity portfolio needs to be around 7-8 years or more.
Other than this, for tax saving purposes — wherein you could avail of a deduction of up to Rs 1.5 lakh in a financial year under the old tax regime — you could consider one of the best Equity Linked Savings Schemes (ELSS), also known as tax-saving mutual funds.
Number of Debt Funds
When investing in debt mutual funds, you need to be mindful that they are not risk-free or safe like bank fixed deposits (FDs).
Choose schemes considering your liquidity needs and investment horizon.
A rational number for debt funds may be around 4. If your investment horizon is 2 to 3 years, banking & PSU debt fund may be considered. To play the interest rate cycle dynamically, a dynamic bond fund may also be considered with a horizon of around 3 years.
For a shorter investment horizon of 1 to 2 years, a good short-duration fund may be considered that has a worthy underlying portfolio of high-rated debt papers with a high allocation to government and quasi-government securities.
For a horizon of up to or less than a year, it would be better to stick to the best Liquid Funds.
These funds invest your money in Treasury bills (T-bills), call money, repurchase agreements, short-term debt securities issued by the government, certificates of deposits (CDs), commercial papers (CPs), and term deposits with the objective of providing capital preservation and liquidity.
Number of Gold Funds
As a portfolio diversifier, hedge and store of value in times of economic uncertainty, gold mutual funds would be a valuable addition.
You may consider a gold ETF or a gold savings fund for this purpose. For the former, you need a demat account. A gold savings fund – a fund of fund scheme investing in the underlying gold ETF – can be purchased directly from the fund house or through your distributor without the need for a demat account.
Tactical Allocation
Having a multi-asset fund in the portfolio could also be a meaningful choice for tactical exposure to three key asset classes – equity, debt, and gold.
The fund manager of a multi-asset fund holds the flexibility to dynamically allocate investments in a mix of these asset classes depending on their outlook.
Some even take exposure to silver ETFs, REITs & InvTs, overseas equities, and derivatives.
Given that not all asset classes move in the same direction always and have a distinctive risk-return trade-off, they can potentially earn you decent risk-adjusted returns over a period of 3 to 5 years.
Conclusion
All in all, you possibly need 7 (equity funds) + 4 (debt funds) + 1 (gold ETF) + 1 (multi-asset fund) = 13 mutual fund schemes in your portfolio.
Even if you are considering a sector fund and an international fund as per your risk appetite, you possibly don’t need more than a total of 15 mutual fund schemes in your portfolio.
So, focus on quality and suitability over quantity when investing in mutual funds and follow a sensible approach.
Be a thoughtful investor.
Happy Investing.
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