Mutual Fund Helpline: How many funds should be there in your portfolio?

Mutual Fund Helpline: Anyone who invests in mutual funds aspires to earn huge profits. However, in order to earn big profits, it is important that investors keep their portfolio clean. It gives you healthy returns over the long term. The road to riches involves doing many small things in a focused way. Diversification of the portfolio is one such important measure that the majority of the mutual fund investors know but are still not sure about how many funds to keep in the portfolio.

SEBI registered tax and investment expert Manikaran Singh believes that an investor should not add more than seven to eight funds in his or her portfolio. "Ideally, 7-8 funds are enough as around 75 per cent of the stocks that a mutual fund house buys are almost same. Hence, buying more than 7-8 mutual funds would be better while diversifying one's mutual fund portfolio," he said. 

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Manikaran said that mutual funds have various categories — debt mutual fund, equity mutual fund, ELSS mutual fund. But, while diversifying one's portfolio, one's risk appetite would be important. In the long-term, means more than 10 years of investment in a mutual fund, a mutual fund investor can expect at least 12 per cent return on one's mutual fund investment if it's in the equity or ELSS mutual fund. However, in a debt mutual fund, one can expect around 8 per cent return.

Kartik Jhaveri, manager — Wealth Management at Transcend Consultants said, "When you buy a mutual fund, you need to pay an expense ratio of your investment per year as well. so, if you buy more than the required number of funds in the name of diversification of the portfolio, it becomes over-diversified portfolio where you lose your money in expense ration, which ranges from 0.75 per cent in debt mutual funds to 2.5 per cent in small-term mutual funds." He said that over-diversification makes it difficult to monitor one's investment as well.