This is a question I asked a few folks when I started investing. And this is also a question which to this day, continues to be asked. How many mutual funds should I invest in? I consider the below factors to arrive at a number. As you would have guessed, this is a pretty subjective topic.
Exposure to Equity, Debt and Alternative Investments
Firstly, we invest in mutual funds to get exposure to Equity, Debt and Alternative Investments (Gold, Real Estate etc). So the number of mutual funds we have is directly proportional to the classes of investments to which you want exposure. So essentially the number of mutual funds I should invest in = Number of mutual funds in (Equity + Debt + Alternative Investments)
Overlapping of stock holdings of the mutual funds
Secondly, there is no benefit in owning too many funds especially if the underlying stocks owned by the funds are the same. If the holdings are the same, I might as well own lesser number of funds to reduce maintenance overhead.
Categories of Mutual funds to hold
Thirdly, the Equity category of mutual funds are categorised into Large, Mid , Small and Multi cap funds basis the market cap of the stocks invested by the funds. Approximately, there are 100 Large cap companies, 150 Mid cap Companies, 250+ small cap companies. So logically, you should have – number of large cap funds < number of mid cap funds < number of small cap funds.
Choosing good performing funds I checked their portfolio overlap. I can see that overlap of small cap funds is a meagre 4%. The overlap for Large cap was 54% and for Mid cap it was 23%. (Note that this need not be true across all funds, but random two good funds).
** The portfolio overlap figures are taken from the below nice and awesome utility site. https://fundpicker.thefundoo.com/Tools/PortfolioOverlap
Given this data, my hypothesis is that we should not have more than 1 Large cap, 2 mid cap and 3 small cap funds. I believe that this set will cover most of the investable stocks in the country. Personally I have 1 large cap index fund, 1 mid cap fund, 2 small cap funds and 1 flexi cap fund. Please note that Flexi cap fund holds stocks from all the three categories).
Apart from these, it’s OK to own a Gold fund, One Debt fund and an REIT if you want. So overall I dont hold anything more than 7-9 funds in my portfolio. Anything more than this, becomes too hard for me to handle and dont provide any kind of benefit. As with anything, I tie down these funds to my life goals and stagger them accordingly. And as I near retirement, I reduce the holding of number of funds and also reduce exposure to Mid and Small cap stocks. So how many funds do you hold?
Great advice – remember 1,2,3.
1 Large cap, 2 mid cap and 3 small cap funds.
Thanks Gautham, exactly 🙂