Mutual funds are good instrument to diversify your investment. It invests in set of stocks based on investment objective of the fund. But managing too many funds are hard to manage and create confusion. Too much of diversification impacts your overall returns from your investment. By the way, “Too many” is subjective. For some, even 3-4 is too many. For others, no number is too high. I am fine with holding funds as long as each fund serves a purpose in the portfolio and has a meaningful allocation. How to avoid Too many mutual funds.
Maximum You can have 5-7 funds with proper financial goal
Investing in multiple funds does not mean better diversification. Many times 2 funds would be investing in same set of stocks and only difference is AMC. Most of time, people try to time the market and invest in best mutual funds of the year based on past returns. Every year, they select different set of funds to get maximum returns by timing. But in long term it does not make major difference other than create much of managing time.
The problem is that most of us do not get the timing right, but invest in multiple funds
1. Remove any fund whose exposure is less than 5% of the portfolio:
Since you are not adding to this fund, this investment will likely become smaller and smaller portion of the portfolio. As the percentage allocation goes down, the ability of a fund or investment to impact overall portfolio performance goes down sharply.
2. Select maximum 2 funds in each category:
Decide the portfolio structure first. Say, 50% large cap, 30% midcap and 20% small cap. Select one in each criteria and start your investment. In case you find better funds in same category, maximum 2 in each category.
3. Invest 20% of your investment in international funds:
If you are looking for diversity along with region, you can invest in international funds. You can invest in S&P 500, Nasdaq 100 funds. It will give you better diversification.
- Check overlap between 2 funds:
Make sure your 2 funds should not have more than 70% overlap. In case more than 80% overlap, you can exit from one and you can invest in only one fund in that category.
- Invest in gold mutual funds:
Gold is best investment and gold can help in case of emergency. Invest 10% of your funds in gold. It would help in case of bearish market. In case of market crash, it can help you to manage risk.
You can select active funds in case you are familiar with fund selection based on expense ratio and fund rating. Otherwise you can invest in Nifty index and Nifty Junior index funds as it bar with index returns.
3 active funds + one international fund + 1 Gold fund
(or)
Nifty index + Nifty Junior index + one international fund + 1 Gold fund
How to check overlap between 2 funds in one click:
There is 2 websites help to check overlap between 2 funds. It helps us to check the overlap and reduce the number of funds in our portfolio. Select the funds to compare in the drop down and click ok. It would list common stock and overlap percentage between 2 funds. In case overlap is more than 70% invest in only one fund instead of 2 funds.
https://www.thefundoo.com/Tools/PortfolioOverlap
https://www.advisorkhoj.com/mutual-funds-research/mutual-fund-portfolio-overlap
Both the charts would show the same result. You can use any one of the link to select best mutual fund to invest. This would help you reduce number of funds in your portfolio.