How Many Mutual Funds Should You Have?

A single diversified equity fund typically holds dozens of companies across many sectors. That is already diversification.

If you buy a second large cap fund, it will probably hold many of the same large companies. A third one, the same again. You end up owning the same shares several times over, with more statements to track. Our page on portfolio overlap shows how to check this.

Think of it like buying five copies of the same newspaper. You have more paper, but not more news.

Real diversification comes from holding different kinds of assets, such as equity and debt, not from holding many funds of the same kind.

Almost always the same way. A fund bought because a colleague mentioned it. Another from a bank visit. A third after it topped a list. A tax-saving fund bought in a hurry every March.

Each decision made sense on its own. Together they add up to something nobody designed. Our post on a plan versus a product is about exactly this pattern.

Start from what the money needs to do, not from fund names.

Long-term growth: one or two diversified equity funds, such as a flexi cap or an index fund, is often enough. Our pages on index funds and fund categories explain the options.

Stability and near-term money: one debt or liquid fund.

A specific tax need: possibly one ELSS, if it fits your tax situation.

That already covers most needs with two to five schemes.

Holding two equity funds can be sensible when they do genuinely different jobs.

For example, a large cap or index fund as the steady core, plus a mid or small cap fund for a small slice of extra growth. Or two different investment styles. Our page on mid cap versus small cap funds covers the riskier end.

What does not make sense is two or three funds from the same category, chosen because each looked good at different times.

• You cannot say what each fund is for.
• Several funds are in the same category.
• The top holdings of your funds are mostly the same companies.
• Some SIPs are so small they barely matter.
• You avoid reading statements because there are too many.

If two or more of these are true, the portfolio probably needs tidying.

Carefully, not all at once.

First, stop new SIPs into the funds you do not want to keep, and redirect that money to the funds you do. That costs nothing.

Then look at existing holdings. Selling has exit load and tax effects, so it is often better to leave old units in place and simply stop adding to them. Our pages on switching mutual funds and exit load explain the costs.

Over time the portfolio becomes simpler without an expensive clean-up. Once an old holding is past its exit load period, you can decide calmly whether to consolidate it into the fund you are keeping, ideally with a tax adviser checking the timing.

Open the monthly fact sheet of each fund and look at the top ten holdings. If most of the same company names appear in both, the funds overlap heavily.

Also check the category. Two funds from the same category usually hold similar shares. Our page on the fact sheet explains where to find the holdings.

It takes ten minutes, and it often answers the whole question on its own.

Some people spread money across many fund houses because they think it is safer. It is not necessary for safety.

Your money is held by a custodian under a trust, not by the fund company, as our page on what an AMC is explains. So holding two funds from one house is not riskier than holding two from different houses.

Choose schemes on their merits, not to collect names.

A tidy way to hold funds is to link each one to a goal: retirement, a child education, a house, the emergency buffer.

The same fund can serve more than one goal if you keep separate folios, which makes it clear what each pot is for. Our page on asset allocation explains how to match money to dates.

Here is an example of a simple structure. It is not a recommendation, just an illustration of how few schemes can cover a family.

• Emergency buffer: the bank or a liquid fund.
• Long-term growth: one diversified equity fund or an index fund.
• A little extra growth, optional: one mid or small cap fund, as a small slice.
• Near-term goals: one short-term debt fund.

That is three or four schemes, each with a clear job. Many families hold far more and get less out of them.

The same logic applies. Several small SIPs into similar funds add little. One or two larger SIPs into well-chosen funds are easier to manage and to raise over time.

Our page on the step-up SIP shows how to grow one SIP each year instead of adding new ones.

• More funds is not more safety. Different asset types are.
• Two to five schemes covers most families.
• Know the job of each fund.
• Clean up gently: redirect SIPs first, sell only with reason.

We are distributors rather than investment advisers and we recommend no schemes. If you want a second pair of eyes on a cluttered portfolio, get in touch.