Investors often face the challenge of determining how many mutual funds to hold in their portfolios to achieve optimal diversification without unnecessary complexity. Here’s a guide to finding the ideal number of mutual funds:
- Recommended Range: Experts suggest holding between 8 and 12 mutual funds. This range balances diversification with manageability, preventing over-diversification which can complicate portfolio management.
- Aligning with Goals: Choose funds based on your investment objectives—whether it’s long-term growth, income, or capital preservation. Ensure that your fund selection reflects your strategic asset allocation, with a maximum of two funds per asset category.
- Diversification Strategy: Incorporate a mix of equity (large-cap, mid-cap, small-cap), debt, and sectoral funds to balance risk and reward. Equity funds can offer growth, while debt funds add stability.
- Avoiding Overlap: Prevent fund overlap to avoid excessive concentration in specific sectors or companies. Select funds with distinct strategies to ensure broad diversification without duplication.
- Core vs. Satellite Funds: Use a core approach with broad-based, long-term funds (e.g., index funds, large-cap equity funds) and a satellite approach for specialized funds (e.g., sectoral or thematic funds). This structure maintains a solid foundation while allowing tactical adjustments.
- Managing Exposure: Cap the size of holdings in any single company or sector to 10-15% of your portfolio. Regularly review fund performance against benchmarks and adjust holdings to avoid underperformance.
- Growth vs. Value: Consider including both growth and value funds in the satellite portion of your portfolio. Adjust these based on macroeconomic factors and market trends for optimal performance.
Regular review and pruning of underperforming funds are crucial to maintain an efficient and effective portfolio.
