Mutual Funds Sahi Hai but don't invest in more than 3 funds - Here's why; check logic with examples

Mutual Funds are subject to market risk...and so on, we have heard these lines number of times. But investing in mutual funds is trending at present because Mutual Funds Sahi Hai. Now, the million dollar question is - How many funds make an ideal portfolio? Is diversification neccessary? What kind of MF categories should be opted for? All these confusions remain unanswered. Hemant Rustagi, CEO, Wiseinvest Advisors told Zee Business Online that an investor should never invest in more than 3 funds depending upon his financial requirements. 

There is no doubt that diversification is essential to create a fruitful portfolio but what should be the limit. Let's decode the problem. Here is guide to make an ideal mutual fund portfolio, Keep these things in mind before investing:

1. Setup your goals first:

An individual should setup his/her goals before investing in mutual funds. The fund should be according to the financial need of the future. 

"Funds should justify the financial needs of the investor, for short term requirements - debt funds are good, while for long term vision, people can invest in hybrid plus equity funds," mentioned Rustagi. 

2. Allocate the amount:

The next important thing is to allocate the fixed amount to each fund. It could be a SIP or any other option. The amount can be invested as per the future needs, depending upon the kind of fund. 

3. Too much diversification is pointless:

"There should not be more than 2 to 3 funds in your basket. It becomes a bit difficult to handle too many funds at a time," said Rustagi. 
 
This clearly justifies that an investor should avoid investing in too many mutual fund schemes as it creates difficult to calculate the final returns from the funds. It also adds risk and volatility to the portfolio making it prone to losses. 

4. Choose funds as per time horizon:

The funds should be chosen as per the time horizon of the requirements. According to Rustagi, in case of an ultra short term requirement, liquid funds are better. While for a 3 year goal, short term debt funds can be opted. However in case of goals of over 8 to 10 years, people can go for long term equity funds.