there is no fixed number. it depends on goals, risk tolerance, and time.
but there is a general principle. diversification is important. overdiversification is a drag on returns.
a 2022 morningstar india study looked at this. returns may be slightly higher with more funds. but the benefit drops off after the first few. adding more funds beyond a point does not meaningfully reduce risk. it only increases complexity.
too few funds
one or two funds is not enough. a single large-cap fund misses mid-cap and small-cap growth. a single sectoral fund is concentrated.
a flexi-cap fund reduces this risk. but it does not eliminate it. it is still tied to one manager’s style.
three funds is a reasonable minimum. one large-cap or index fund. one mid-cap or flexi-cap fund. one debt fund. this provides basic diversification.
too many funds
too many funds create real costs.
overlap. many funds hold the same stocks. the portfolio looks diversified on paper. but underneath, it is concentrated. the investor pays multiple expense ratios for the same exposure.
complexity. tracking 20 funds is harder than tracking 5. rebalancing is complicated. tax planning is more difficult. more work for no benefit.
diminishing returns. the 10th fund adds less value than the 3rd. it does not reduce risk. it just adds another statement.
what the research shows
the morningstar study analysed portfolios with 1 to 20 funds. the findings were clear.
portfolios with more than 8 funds did not reduce risk much compared to 4-5 funds. diversification benefits were largely achieved by 4-5 funds. adding more funds increased the administrative burden. it did not reduce risk.
risk-adjusted returns were similar across 4-5 fund portfolios and 10+ fund portfolios. more funds did not mean better results.
how many funds per category
| category | recommended number |
|---|---|
| large cap / index | 1 |
| mid cap / small cap | 1 |
| flexi cap | 1 |
| debt funds | 1-2 |
| sectoral / thematic | 0-1 (only for investors who understand the sector) |
this keeps the total between 4 and 7 funds. manageable for most investors.
what matters more than the count
the number of funds is less important than the quality. a well-chosen set of 4 funds can outperform a poorly chosen set of 15. expense ratio matters. fund manager track record matters. consistency matters.
asset allocation matters more than the count. 80% equity and 20% debt behaves differently from 60% equity and 40% debt. the allocation between asset classes is more important than how many funds are used.
when to add a fund
add a fund only when it serves a distinct purpose. a new role not already covered. a new exposure to a specific sector or asset class. a slightly different style.
if the new fund overlaps heavily with existing funds, it does not add value. it adds complexity.
frequently asked questions
1. how many mutual funds should an investor hold ?
between 4 and 7 funds is generally sufficient for most investors. provides diversification without excess complexity.
2. what happens if a portfolio has too many funds ?
overlap increases. complexity rises. the marginal benefit of each additional fund decreases. returns may not improve.
3. can a single flexi-cap fund be enough ?
a single flexi-cap fund provides diversification across market capitalisations. but it is tied to one manager’s style. adding one or two more funds provides broader exposure.
4. how often should mutual fund holdings be reviewed ?
at least once a year. review helps identify underperforming funds, check for overlap, and ensure alignment with goals.
5. is holding funds from different amcs better ?
not necessarily. some investors prefer different amcs for diversification of fund management risk. but the quality of the funds matters more than the amc.
