How Many Mutual Funds Should You Hold? Avoid Duplication & Over-Diversification

“How many mutual funds should I have?” a question almost every investor asks at some point.

It’s tempting to think that the more funds you own, the more diversified  and safer  your portfolio becomes. But in reality, owning too many mutual funds can create confusion, overlap, and diluted performance.

True diversification isn’t about quantity; it’s about purpose. The right number of mutual funds is the one that aligns with your financial goals, time horizon, and risk profile  not with what’s trending in the market.

How Many Mutual Funds Should You Hold?

Firstly, this completely depends on your goals, investment horizon, and comfort with risk.
There’s no fixed number for everyone, but it’s generally wise to own more than one mutual fund to avoid relying solely on a single fund manager’s approach or performance.

Putting all your money in one fund exposes you to fund manager risk  even the best managers can go wrong in certain market conditions. That’s why spreading your investments across a few well-chosen funds makes sense  but too many can backfire.

How Many Mutual Funds Are Enough?

For most investors, 3 to 5 mutual funds are enough to create a strong, goal-aligned portfolio. Beyond that, diversification loses its effectiveness.

A portfolio with 15 overlapping funds isn’t diversified, it's just overcomplicated.

When multiple funds hold the same stocks, you don’t reduce risk, you simply multiply redundancy. A well-balanced set of funds is easier to manage, track, and rebalance, and often delivers better long-term results.

Why Holding Too Many Mutual Funds Doesn’t Improve Diversification

Many investors assume that owning multiple mutual funds, especially from different AMCs or categories, automatically reduces risk. But the truth is, more funds often lead to duplication, not diversification.

It’s good to hold strong, quality companies, but repeating the same holdings across several funds doesn’t make your portfolio safer, it simply makes it harder to manage.
For example, you may hold an HDFC Large Cap Fund and a Mirae Asset Large Cap Fund, yet both could have Reliance, ICICI Bank, and Infosys among their top holdings. In that case, you’re not spreading risk, you're just repackaging the same stocks under different fund names.

When duplication builds up, your portfolio:

• Dilutes performance: Top performers lose impact as weaker funds weigh them down.

• Increases overlap risk: Multiple schemes move in the same direction during market swings.

• Becomes harder to track: Managing 10–12 funds adds complexity, not clarity.

Owning good companies is important  but overdoing it through similar funds doesn’t strengthen your portfolio.

True diversification means aligning funds with your goals, not just collecting different fund names.

Building a Balanced Mutual Fund for a Long term Portfolio

Diversification should come from different categories and asset classes, not multiple funds of the same kind.

Here’s a simple, goal-based framework for building your mutual fund portfolio:

That’s 3–5 funds  enough to cover most financial goals efficiently while keeping your portfolio focused and manageable.

Case Example 1.  Riya : The Focused Investor

Riya, 35, started with 12 mutual funds across different AMCs. After reviewing her portfolio, she found that 7 of them held the same top 15 stocks. Her returns were barely matching the index.

She consolidated her portfolio into 4 goal-based funds  ELSS, Flexi Cap, Hybrid, and Liquid.
The result? Simpler tracking, better clarity, and improved performance.

Case Example 2. Amit :  The Over-Diversifier

Amit believed more funds meant more safety. He invested in 10 equity funds, including 3 large-cap and 2 mid-cap schemes.
When the market corrected, his portfolio fell sharply; duplication hadn’t protected him from volatility.

He trimmed down to 5 purpose-driven funds across equity, hybrid, and debt categories. His portfolio became easier to review and better aligned with his goals.

Case Example 3. Raj:  The Goal-Based Planner

Raj, 30, holds one fund each across large-cap, hybrid, mid-cap, and debt categories.
This balanced structure provides both growth and stability. He reviews his portfolio annually to ensure it remains aligned with his financial goals and risk tolerance.

Smart Portfolio Management Tips

1. Diversify Across Asset Classes:
Include a mix of equity, debt, and hybrid funds to manage volatility and returns effectively.

2. Avoid Overlapping Funds:
Before adding a new fund, check its top holdings. If they match your current funds, skip it.

3. Review Regularly:
Review your portfolio annually and rebalance if your goals or income change.

4. Map Every Fund to a Goal:
Every fund should serve a defined purpose  whether it’s retirement, children’s education, or short-term savings.

5. Consult a Professional:
If you’re unsure, seek guidance from a SEBI-registered financial planner to build a goal-driven, risk-adjusted portfolio.

Conclusion

The ideal number of mutual funds isn’t a formula  it’s a reflection of your goals. When each fund in your portfolio serves a clear, measurable purpose, you eliminate guesswork and build discipline.

Disclaimer

The mutual funds and examples mentioned in this article are for illustrative purposes only and should not be considered as investment advice or recommendations.