Too many mutual funds? Why three well-chosen schemes may work better than 10, explains expert

Investing in multiple mutual funds may appear to be a sensible diversification strategy, but holding too many schemes could make portfolios unnecessarily complicated without significantly reducing risk. Financial experts warn that investors often accumulate funds over time without checking whether their investments overlap or serve distinct financial goals.

Deepak Dhabalia, Director at DDSW Services Pvt. Ltd, says investors frequently end up owning eight, ten or even fifteen mutual fund schemes, believing that a larger portfolio automatically provides better diversification.

“In over 30 years of working with clients and their financial goals, I have seen this happen repeatedly. Investors rarely set out to build a complicated portfolio. It happens gradually,” Dhabalia said.

Investors may start with one or two schemes before adding funds based on recent returns, new fund offers (NFOs), recommendations or the popularity of particular market segments.

Why more mutual funds may not mean better diversification

The biggest concern is portfolio overlap. Different mutual fund schemes may invest in many of the same underlying companies, leaving investors exposed to similar risks despite holding several funds.

For instance, a large-cap fund, flexi-cap fund, index fund and large-and-mid-cap fund may all hold substantial positions in the same leading companies.

Consequently, owning multiple schemes does not necessarily translate into exposure to different businesses or market segments.

“This is why I believe mutual fund investing should begin with the goal and time horizon, not with the number of schemes,” Dhabalia said.

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Are three mutual funds enough?

According to Dhabalia, investors pursuing financial goals seven years or more away may find that three carefully selected equity mutual funds are sufficient.

However, the appropriate number depends on individual risk appetite, investment horizon, asset allocation and financial objectives.

The focus should be on selecting schemes that perform distinct roles rather than accumulating funds simply because they have delivered strong recent returns.

Before investing in another scheme, investors should assess whether it provides exposure or diversification that their existing holdings lack.

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How portfolio clutter affects returns

Managing ten or twelve mutual funds can make portfolio monitoring and rebalancing difficult.

Investors may also become distracted by differences in short-term performance, frequently replacing underperforming schemes with recent winners.

Such behaviour can encourage performance chasing rather than disciplined long-term investing.

A smaller portfolio, meanwhile, allows investors to evaluate fund performance, identify overlapping holdings and maintain their intended asset allocation more easily.

What should investors do?

Dhabalia believes successful investing depends more on consistent contributions, appropriate asset allocation, periodic reviews and patience than on continuously adding schemes.

Investors should review their existing funds, identify duplication and assess whether every investment supports a specific financial objective.

However, consolidating funds should also account for exit loads, taxation and suitability.

Ultimately, diversification remains essential, but adding schemes without a clear purpose may increase complexity rather than improve portfolio quality.

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