Choose your ideal number of funds
It has been a trend that the longer you have been investing in mutual funds, the chances are that you will have more funds in your portfolio. According to research by an online mutual fund investing platform, the average mutual fund investor on any platform holds as many as nine schemes in his or her portfolio. Moreover, the longer a person has been an investor, the greater is the number of mutual fund schemes held in the portfolio. According to the same report, investors who started investing in 2002 have almost 18 schemes on average and those who entered in 2010, have 12 schemes while those who entered in 2018, have six schemes. So, what is the ideal number of schemes that one should have in his portfolio? There is not a fixed standard size that fits all. It depends upon personal preference and personal goals; however, it should be determined by the following rules:
Define your financial goals
Before starting a journey, you should know your destination, which will ultimately help you to choose the right path. Financial goals are your destination, and mutual funds are your path. To figure out why you're investing what you're investing, one should know how much money to have in hand before planning for that goal. Your goals and your risk tolerance would then determine your portfolio and the fund selection.
Build a core portfolio
For each goal that you have identified, you should have more than three or four funds. Most of your investment to achieve this goal should be invested in these core funds. Simplify the investing process by focussing on a few funds that can deliver what you want, and invest in those funds, rather than adding other funds.
Add tactical to the core portfolio
Non-core holdings are the flavour of the season and are used to juice up total returns. For example, an index fund can be a part of the core and IT or pharmaceutical funds can be used as a tactical allocation to increase your total return of the portfolio. They should not exceed 30 per cent of your total portfolio.
Diversify your portfolio
Do not pin down to any particular number of funds in your portfolio. There are investors, who hold more than 20 funds in their portfolio and still are not diversified as they hold a similar type of funds. In other extreme cases, there are investors who are perfectly diversified by owning just two or three funds. Hence, intelligent diversification makes sense; either you increase return potential or reduce the risk of your portfolio before adding any other fund.