Mumbai: Investing in mutual funds aims to generate double-digit returns that outperform inflation, compared to the internal rate of return (IRR) of different financial instruments, like government schemes, which do not exceed inflation with single-digit returns. With the increasing awareness and popularity of mutual funds, many investors have started investing in mutual funds actively.
However, according to financial experts, adding more mutual fund schemes to your portfolio can be a serious investment mistake that can impact returns. Investing in too many mutual funds can lead to owning the same stocks or debt assets across several similar funds, resulting in duplication of stock holdings. While it’s understandable that investors seek diversification and high returns, financial experts warn against investing in too many mutual fund schemes with similar stock holdings, as this defeats the whole purpose of diversification.
So, what defines too many schemes under mutual funds?
There is no fixed number of mutual fund schemes that are considered “too many.” However, having a reasonable number of mutual funds is advisable to ensure a diversified portfolio, effective risk management, and wealth accumulation. It is important to note that adding more mutual funds to your portfolio might not improve it and could potentially lower your expected returns, at times even falling below the inflation rates.
Why is it detrimental to have too many mutual funds?
When multiple funds have similar goals and nature, low-return funds can drag down the portfolio’s overall profits, making it challenging to generate returns. This also complicates the monitoring process. As the number of funds increases, especially with underperforming assets, reviewing the portfolio’s performance can become time-consuming and challenging.
What better strategy investor can use to avoid over-investing?
Goal-based investing involves choosing how to invest for each of your goals and setting a time limit to achieve them. It is the key to effective money management. Following these goal-based investing principles will help you navigate the mutual fund’s scheme efficiently and achieve your financial objectives.
Based on your goals and time horizon, consider different investment options, such as equity funds, index funds, and ETFs. These options will diversify your portfolio and complement each other, unlike investing in several mutual funds of the same kind.
Find the right mix of funds to maintain a healthy balance, especially if you are new to investing and prefer a cautious approach. Your risk tolerance, financial objectives, and preference for passive or active management will also influence your choices.
According to experts, a portfolio with 8 to 9 schemes is ideal. Allocate 2 for short-term needs, 2 for medium-term goals, and 4 to 5 for long-term objectives. Typically, short—and medium-term funds are debt or hybrid funds, while long-term funds can be equity, hybrids, or a combination, depending on your risk appetite.
Investing in too many mutual funds with similar goals and nature, can drag down the portfolio’s overall profits, making it challenging to generate returns, which also complicates the monitoring process. Mutual fund overload? Is there an ideal perfect number of mutual funds to invest in? Business Business News – Personal Finance News, Share Market News, BSE/NSE News, Stock Exchange News Today
