What is the maximum number of funds that you should invest in?

Recently one of our readers asked an interesting question regarding investing in mutual funds. We have heard that we need to link each of our investments to goals. And then we should choose some of the best performing funds and start investing in them for these goals. But do you know what is the optimal number of funds that you should have in your portfolio?

You may have multiple long term goals. But does that mean that you should have the same number of funds in your portfolio? Well, I don’t think that will be a wise thing to do. Diversification of investments is required to protect the returns of your portfolio. So that even if 1 or 2 funds don’t perform well, the performance of the other funds can boost your overall returns. But at the same time, too many funds in the portfolio can lead to over-diversification. And that will, in turn, reduce the overall returns significantly. So then what should be the maximum number of funds to invest in? Well, read on to find out! 🙂

The conversation took place between my reader and me. He had a similar query regarding the number of funds that I answered. Hope you enjoy reading it.

Reader: Hey money guru! The content of your blog has been soo awesome. Keep up the good work

I am very new to investing and I have a basic question. The general rule I am applying to invest in mutual funds is 1 SIP per long term goal. Now, I have 5 long term goals that are due 10-15+ years. So, I have planned for 5 sips each per goal. But, often I am getting advice from fellow investors that this number is huge and it diversifies portfolio unnecessarily and is asked to go for 3 sips only which is 1 per fund cap. I am a bit confused here, is my strategy wrong ??
Can you please help me here with your insights? Thanks for your help

Me: Dear reader, thanks for the question. Ideally, you should not have more than 3-4 funds in your portfolio for all your goals. That leads to over-diversification which in turn decreases the returns over the long term. What you can do is choose 3-4 funds and then increase the SIP amount in each of them.

Me: Kind of. When your goal is very near, let’s say in the next year then withdraw the equivalent amount from the fund and put it in a debt fund. That will ensure that the market volatility does not reduce the corpus. For all your goals, choose 3-4 funds and start SIPs accordingly. Increase the SIP amount based on your goals. If you want to invest total 20k per month for all your goals, then choose 4 funds and start SIP of 5k in each. I hope I was able to clear your doubt?

Reader: Awesome guru One small clarification, let’s say I start for 20k and put in 4 funds 5k each. Then let’s say I tag each fund to 1 goal each. If I identify some 5th goal tomorrow, then your advice is to not start a fund but to add 2.5k on top of either of the 2 funds? Something of that sort? And when the goal is nearer I can sell off some units and put in debt to avoid volatility.