This is the question on every investors’ mind when he/she thinks of investing in mutual funds. As the saying goes “don’t put all your eggs in one basket” and it goes equally well in the case of investments. So, you should be diversifying your portfolio to spread risk across stocks, fund categories, fund managers, market cap, and classes.
Mutual fund investors tend to invest the money as if they were investing in the stock market. They choose 15-20 schemes to put their investments across different categories. Well, exactly this shouldn’t be the case because it defends the purpose of diversification.
But these motives get diluted when over-diversification takes place. If all the above benefits can be achieved by investing in a small number of schemes, then why to go for more?
There are different fund categories like Large-cap, mid-cap, and multi-cap funds through which differentiation between mutual funds is done based on their investment objectives and principal investment features. By this categorization, investors can spread their money around in a mix of funds with a risk reduction. So, go for not more than 4-5 categories.
Schemes are the type of funds under the categories where your money would really be invested in.
Well, the answer that is narrowed down is that you should have around 4-5 categories in your portfolio and 1 scheme per category. So, that amounts to almost 4-5 schemes in your portfolio and there you go. After thinking about all the parameters, you can choose the top-performing mutual funds for your portfolio.
Because once the number rises above the desired limit it is impossible to keep track of changes in fund managers, expense ratio, dividends, investment objective. The difficulty arises when there are many schemes to keep track of. An outperforming scheme may hide an underperforming scheme and you may hold it for long.
A diversified equity mutual fund usually has about 40-60 stocks in its portfolio. When you will add more and more fund schemes the chances of stock overlapping increase defeating the purpose of diversification.
Your portfolio investment should be like this -
In all, we will be suggesting you go by the rule of “One scheme per category rule” and a maximum of 4-5 schemes in your portfolio because that increases the chances of you receiving a higher return on your investments.