Too many mutual funds in your portfolio? The sweet spot may surprise you

Experts say the real trick lies in avoiding stock overlap and focusing on quality, not quantity.

Many retail investors believe that owning several mutual funds automatically reduces risk. But experts say this often leads to duplication, complexity, and diluted returns. 

“For most investors, holding around 13-14 mutual funds provides ample diversification across asset classes and categories without unnecessary overlap. Each fund typically holds 40-70 stocks, so adding more schemes often duplicates exposure rather than reducing risk,” said Thomas Stephen, director & head – preferred at Anand Rathi Share and Stock Brokers.

 

He adds that managing 20-30 equity funds can make it difficult to track performance or stay aligned with financial goals. A regular portfolio review helps retain only the most suitable schemes.

 

 

Rajani Tandale, senior vice president, mutual funds at 1 Finance, puts it more simply. “The right number is not ‘as many as possible,’ but ‘as few as necessary’ to cover key risk buckets, equity, debt, and liquidity.”

 

According to her, even 2-3 equity funds, ideally a mix of index and flexi-cap schemes, can offer enough diversification for most investors.

 

Over-diversification: When your portfolio starts behaving like an index

Aditya Agarwal, co-founder of wealth management platform Wealthy.in, cautions that more funds don’t always mean better returns, “For a Rs 25 lakh portfolio, three to four funds across categories are enough. Beyond that, duplication sets in,” he says.

 

For larger portfolios of Rs 50 lakh to Rs 1 crore, he recommends 4-10 funds diversified across equity, debt, hybrid, and perhaps a small international exposure.

 

“Holding more than two funds in the same category, say, two large-caps, serves no purpose and can increase overlap,” Agarwal adds.

 

Ajay Lakhotia, founder and chief executive officer of StockGro, notes that over-diversification often turns active portfolios into expensive index replicas. “Investors holding three or four flexi-cap or large-cap funds often end up owning the same Nifty 100 stocks. The combined portfolio behaves like an index fund but with higher costs,” he explains.

 

Tandale’s research at 1 Finance found that 65 per cent of the industry’s equity AUM is concentrated in large-caps. “Too many overlapping funds blur conviction, you end up owning the index without realising it,” she says.

 

Stock overlap: The hidden trap in your portfolio

Stock overlap occurs when multiple funds hold the same underlying stocks. Stephen warns that when overlap exceeds 50 per cent, “the portfolio isn’t genuinely diversified, and the returns become highly correlated.”

 

To detect this, Agarwal suggests reviewing fund fact sheets to spot repeated top holdings and sectors. Online tools such as those on Value Research or ET Money can help investors measure duplication.

 

Tandale recommends keeping overlap between two funds below 40 per cent. “If two schemes own the same top holdings in similar weights, you’re just diversifying fund names, not underlying exposure,” she says.

 

Best practice: Building a balanced, goal-linked portfolio

Experts agree that fund selection should start with financial goals and risk appetite, not fund count.

 

Lakhotia advises a structure aligned to time horizons:

 

Short-term (0–3 years): Debt or liquid funds for liquidity and emergency needs

 

Medium-term (3–5 years): Hybrid or balanced funds for moderate growth

 

Long-term (5+ years): Equity funds, large-cap for stability, flexi-cap for diversification, and mid-cap for growth

 

Agarwal also recommends a “three-bucket” approach, liquidity, cashflow, and growth to keep investing simple and purposeful.

 

Advice for young investors: Start small, stay consistent

 

Starting young is the biggest advantage, says Stephen. “Time allows your returns to compound. The goal isn’t a huge starting amount, but consistent investing habits,” he said.

 

Lakhotia suggests that a 25-year-old investor can begin with four to six funds, one large-cap or index fund, one flexi-cap, one mid-cap, and a hybrid or debt fund for emergencies. Optional exposure to international or thematic funds can add global diversification.

 

Tandale adds a word of caution, “At this age, focus on longevity and discipline rather than chasing short-term returns. SIP consistency beats fund-chasing.”

 

Diversification is essential, but more is not always better. As Agarwal sums up, “The key is to hold different funds for different purposes, not many funds doing the same thing.”

 

A handful of thoughtfully chosen, well-reviewed schemes can go much further than a cluttered collection of overlapping funds