How many mutual funds should an investor have?
You must have always heard the benefits of Diversification in stocks to mitigate the risks involved. But when it comes to already diversified mutual funds,
An ideal number of mutual funds in a portfolio totally depends on a person's current income, asset allocation and risk tolerance considering the drawbacks of over-diversification.
The number of funds should be decided after asset allocation is properly determined.
The ideal number of mutual funds an investor should have is 4-5.
Beyond 5 funds, returns could be average due to the repetition of stocks in the portfolio.
These 5 funds must take care of your asset allocation
How do you decide which type of mutual fund should comprise this ideal number? For most people:
Large Cap Funds: Stick to 2 or 3 at most to avoid overlap.
Mid Cap Funds: Keep it to 2 for higher returns but higher risk.
Small Cap Funds: Limit yourself to 2 due to their high risk.
Debt Funds: 1 is ideal, but 2 is okay since they offer similar returns.
Sector Funds: Only invest if you know the industry well.
It's okay if you want to own a lot more or a lot fewer mutual funds than recommended here, as long as you make your choice based on good information.
