Mutual Funds: How many are enough?
Stilling deciding if you should buy another next Mutual Fund or not let us first re-examine why you considered buying it in the first place.
First off, not all of us are experts at understand the market. In fact most of us don't even understand the intricacies of the various market forces. We just understand the market broadly, and that information is not enough to risk our hard earned money in the stock market. The second most important factor for considering a Mutual Fund is the ability to diversify your funds across segments and spread your risk evenly such that it is mitigated overall.
Mutual Funds are hence the best answer to these two criteria – your funds are in the safe hands of professional financial advisors who can time the market better than you and understand its movements. They will spread your funds across various segments and cushion markets risk using this diversification. But sadly, a particular Mutual Fund targets only a few select companies and each Mutual Fund has its own list of companies it invests in. Hence you buy multiple Mutual Funds to cover as many companies as possible.
This is good, however, by hoarding several Mutual Funds one fails to maximise their returns. A single Mutual Fund covers about 40-50 companies. Even with overlaps, about five-six varieties of Mutual Funds which address different sections of the market and should be more than enough to cover the top best 100 companies.
To do this evenly, one should select at least one each from large stocks, small stocks and mid-cap stocks. While these can be from the equity side, you can also pick a few Mutual Funds from the debt side. This when done correctly, will fall in the range of five to six Mutual Funds which are diversified amongst themselves and should be more than enough to evenly diversify your funds throughout the market.
Besides, these five to six Mutual Funds are an ideal number of schemes that one can track regularly and stay on top of. After a while, you wouldn't even remember the name of your Mutual Funds let alone the reason why you bought them specifically. Any more Mutual Funds than this number, adds little or no value to your portfolio.