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After my blogs regarding investment in various investment instruments and especially about investment in Mutual funds, many readers have asked me that how many funds they should have in their portfolio. <\/p>\n\n\n\n
Although there is no straight answer to this as this depends on a combination of many factors like your age, your investment horizon; your risk profile and above all your financial goals and so on.But for the investors who are in their 50s and want to save mainly for their retired life, it is advised that three or four numbers is good enough.<\/p>\n\n\n\n
As already mentioned, efficiently managed Mutual Funds offer investors low-cost access to high quality managers and to following too many funds may not be practically possible at this advanced age. Mutual Funds span the spectrum of risk and potential returns, from non- fluctuating money- market funds. But there is always a need to review the performance and re-allocate your investment from time to time.
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What Is Diversification : –<\/strong><\/p>\n\n\n\n \u201c Don\u2019t put all your eggs in one basket\u201d, is the proverb we all have learned in school. When we grew up and became investors, we learned that this is a basic virtue we need to imbibe and it is also called Diversification.<\/p>\n\n\n\n Funds investors took this as an injunction that they should invest not just in one or two funds, but in large number of funds. This is not Diversification. To understand, consider why we Diversify. Diversification saves you from poor performance of a set of investments. If a particular company or sector does worse than the market in general, then having only a small part of your money exposed to it helps. Diversification could also be across company sizes as sometimes only smaller or larger companies do well or do badly. It could also be geographical. Diversification does nothing for you when the entire market declines.<\/p>\n\n\n\n What Should Be The Size Of Your Portfolio : –<\/strong><\/p>\n\n\n\n <\/strong>Most of the investors , therefore, think that investing in two funds was better than one; three was better than two, four was better than three; and so on. Is there an upper limit here? Is investing in 10 funds better than in nine? What about 20? Or 50 or even 100? At some point Diversification becomes pointless, and then it becomes counterproductive and eventually it becomes ridiculous. <\/p>\n\n\n\n Is there a point of diminishing returns? Most investors would think a limit on Diversification was a strange idea. A few years ago, someone asked me how many funds he should invest in. I said that three or four was a good number. Later the person mailed me his portfolio and I realized that while the sense of my answer was that he should invest in no more than three or four funds, he had assumed I had meant a minimum of three or four funds. Because most of the investors think that the way to achieve Diversification is to invest in a lot of funds. Why Too Much Diversification Is POINTLESS?<\/strong><\/p>\n\n\n\n <\/strong> Investing in too many funds is not Diversification. The truth is that no additional Diversification is provided by investing in more funds beyond a certain point. Mutual Funds are not an investment by themselves. They are a way of holding the underlying investments which, for equity funds, are stocks. The reason why too much Diversification Is Pointless is that stocks held by similar funds tend to be of a similar set. Beyond a small number, when you add more funds, you are generally adding more stocks<\/strong> that are similar or identical to what you already have.<\/p>\n\n\n\n The real reason most investors invest in too many funds is because someone sells it to them and earns a commission. The investor does not have a clear idea of what Diversification is and thinks more funds are good. It\u2019s not just a question of there being no benefit from investing in more funds, it is actually detrimental. Having too many funds in one\u2019s investment portfolio devalues one major advantage of investing in Mutual funds, which is convenience of tracking and evaluating one\u2019s investments. Having investments in large number of Mutual funds makes this exponentially more difficult. Periodically, perhaps once a quarter, investors should evaluate each fund in their portfolio and see if it\u2019s contributing what it\u2019s supposed to. How To Limit Diversification : –<\/strong><\/p>\n\n\n\n However, when you have 15 or 20 funds, most of them bought because some sales person delivered a hard pitch, then this exercise of review is impossible. There will be funds which are 2 percent or 3 percent of your portfolio and it\u2019s hard for you to figure out what they are doing there, what you should expect and what difference it would make if they were doing well or badly. It\u2019s hard to meet your financial goals when you can\u2019t evaluate and manage your portfolio because it\u2019s bloated.<\/p>\n\n\n\n The sweet spot for the ideal numbers of funds tends to be three or four, anything more is a waste of effort. In fact depending on the size of someone\u2019s investments, it could be even less. For someone investing perhaps, $250- 300 a month, one or two balanced funds are ideal and anything more than that is Pointless. Some Other Key Points For Consideration : –<\/strong><\/p>\n\n\n\n <\/strong> 1 Don\u2019t Invest Based On Sales Solicitations : –<\/strong><\/p>\n\n\n\n <\/strong>All companies have to do some promotion, but beware of the companies that advertise and solicit prospective customers aggressively with various tactics. Good companies get plenty of new business through the word-of-mouth recommendations of satisfied customers. 2 Don\u2019t Invest In What You Don\u2019t Understand : –<\/strong><\/p>\n\n\n\n <\/strong>Before, you invest in anything, you need to know its track record, its true cost and how liquid( easily convertible to cash) it is. Don\u2019t go blindly by the advice or recommendations of brokers. 3 Minimise Fees : –<\/strong><\/p>\n\n\n\n Avoid investments that carry high sales commission and management expenses. Management fees create a real drag on investment returns. Not surprisingly, higher-fee investments, on average, perform worse than with lower fees. CONCLUSION ; –<\/strong><\/p>\n\n\n\n <\/strong> Investment in Mutual Funds is a better way of investment by small investors. But to understand their success is to grasp how and why these funds work for you. So, periodic review of the funds vis-a-vis your goals is very necessary and for proper review , the size of your portfolio should be small.<\/p>\n\n\n\n <\/p>\n","protected":false},"excerpt":{"rendered":" After my blogs regarding investment in various investment instruments and especially about investment in Mutual funds, many readers have asked me that how many funds they should have in their portfolio. Although there is no straight answer to this as this depends on a combination of many factors like your age, your investment horizon; your … <\/p>\n
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