How many mutual funds should your portfolio really have? Find out

As of 28 February 2025, India’s mutual fund industry’s assets under management (AUM) stood at ₹64.53 trillion according to data provided by Association of mutual funds in India (AMFI).

This number witnessed a drop of about 4% from January’s ₹66.93 trillion due to weak stock market conditions primarily due to the: continuous selling by FIIs, ongoing Russia-Ukraine war, threat of Trump tariffs and persistent inflation along with a stronger dollar in comparison to the rupee. All these factors cumulatively have led to a sharp decline in Indian equity markets of late.

Further, equity mutual fund inflows have declined by over 26% to ₹29,303 crore. Thus marking a second straight month of decline. Now, it is important to acknowledge that despite this short-term dip, the sector has grown over fivefold from ₹12.02 trillion in February 2015 to ₹64.53 trillion in February 2025, also India as an economy has a long way to grow and evolve itself into an economic powerhouse.

In the backdrop of these developments and the rapid financialisation of the Indian economy, it is crucial for all mutual fund investors to be careful and take considered, well thought-out investment decisions.

It is also important for investors to ponder upon the number of mutual funds they should invest in and keep in mind the danger of over-diversification. For taking care of the same, the following important points should always be kept in mind:

What are the dangers of over-diversification?

Do remember, too many mutual fund schemes will hurt your portfolio. Nearly all mutual funds are putting 50 to 60 stocks in most of their equity mutual fund schemes, and thus you are left with double the holdings without reducing the risk at all. It can provide you with lower overall returns and even make it hard to manage.

For example: If you own 10 mutual funds, you can have over 500 stocks in your entire portfolio, and it will be hard to hold and manage them in the right way. Not only this, higher mutual fund numbers also mean higher cost on redemptions. That is why it is not prudent to invest in a lot of mutual fund schemes at once. On the contrary it is sensible to invest in a limited number of mutual fund schemes through the direct mode according to your long-term goals.

Recommended number of mutual funds

Experts advise a diversified portfolio with a few mutual funds. Two to three funds is a standard practice depending on your investment horizon, holding period and risk appetite. For equity mutual funds, three to five schemes of different mandates can be considered.

Further, for investments in debt funds, one should be careful to save capital and invest depending on your liquidity need and investment horizon. Therefore, a lot of diversification is not required and also not suggested. As discussed by Warren Buffett: “Wide diversification is only required when investors do not understand what they are doing.”

Practical portfolio management techniques

To prevent over-diversification, use the following techniques:

• Diversify across asset classes sensibly: Invest in a mix of equity, debt, and hybrid schemes to keep the risk-return profile intact. If in doubt consult professionals on proper diversification and prevent yourself from over-diversification and under-diversification both.
• Avoid overlapping funds: Avoid schemes with overlapping mandates or similar portfolios to prevent repetition of stock in your portfolio. For this, carefully read and understand the different schemes and invest only after clearly understanding the differences.
• Regular portfolio review: Check your portfolio performance from time to time with peers and benchmarks. This is crucial to ensure alignment with your objectives. Further, regularly review your portfolio to ensure that the schemes where you are invested are having distinct stocks in them and are offering unique investment angles. For example: Large Cap, Mid Cap or Small cap mutual fund investment schemes in different sectors such as automobile, IT, FMCG etc.

Hence, maintaining a fairly diversified mutual fund portfolio is essential for growth and long-term success in investing. Further, over-diversification on the other hand can dilute returns and make portfolio management difficult, while strategic and planned allocation across asset classes and careful fund selection can optimise performance.

Therefore, by sticking to three to five well-chosen equity funds and aligning debt investments with liquidity needs, prudent investors can manage risk effectively. Regular reviews and avoiding overlapping mandates will ensure a streamlined portfolio, helping investors achieve their financial goals with greater efficiency.

Finally, if in doubt it is always sensible to reach out to SEBI registered investment professionals for the correct advice on equity investments, diversifications and wealth conservation.

Disclaimer: Mutual fund investments are subject to market risks; please read all scheme-related documents carefully before investing.