How many mutual funds should I have?
It is a sign of positive change that the younger generation in India has become investment conscious and are more receptive to investing in mutual funds, than it was a decade ago. At the same time, there is so much to choose from; there are so many mutual fund schemes in India , that one becomes unsure of how many schemes to actually invest in for optimum diversification.
One must realize that mutual funds are as diverse as they come. Each scheme comes with its own set of objectives, risks, performance metrics, history and variables. Also every investor has her or his own set of aspirations and objectives. There is also no set rule as to how many mutual funds should one actually invest in.
In fact, you will automatically figure out the quantity of mutual funds you may go for, depending on 3 things – Your investment Objectives, Your Risk Appetite and Investible Surplus. If you are someone with a higher amount of disposable income and have long-term objectives, you would go for equity funds, while a person who is close to retirement may look for a balanced or debt fund that provides a consistent source of income.
Even equity mutual funds, that benefit a person with long-term growth perspective, have so many categories for diversification. Within equity, you have large cap, mid-cap, small-cap, sectoral, global funds etc. If you want to save on tax and create wealth on a long-term perspective, it is recommended to opt for Equity Linked Savings Scheme (ELSS) that helps you in saving tax, but have a three-year lock-in period.
Though diversification is advisable in case of mutual funds, too much of it has its own pitfalls. For example, when you end up taking similar funds which contain the same stocks as their components, it nullifies the idea of diversification in the first place. So when you are looking for diversification, looking at the underlying securities within the schemes you invest, to make sure that there is a clear differentiation among the assets.
Also, if you have too much mutual fund investments, it may be difficult to manage them. Keeping track of folio numbers, lock-in periods, statements, redemption; etc can be cumbersome.
A well-managed fund invests across different companies, different sectors and companies in various stages of growth, thus creating optimum diversification within itself. So, if you are looking for diversification, you should look for diversification between fund managers.
You should seek the help of an expert financial planner, who can work with you and decide on the number of mutual investments, you should go for, depending on your investment objectives, investment time-perspective and risk appetitive. Depending on the portfolio that you built in line with your objectives, you can pick funds that serve specific purposes
Thus, when you have to choose the number of mutual funds you should invest; go by your own financial goals and not by the salesman’s rosy marketing picture. Keep an average of four mutual funds that are of different types, and are managed by different fund managers.
Visit www.roboadviso.com to find out the optimum mix of Mutual Funds for your portfolio.