I often see mutual fund managers and personal finance experts recommend limiting your portfolio to no more than 5 mutual funds. This advice is widely echoed across platforms like Reddit and various finance communities, typically in the context of avoiding redundancy, overlap, and portfolio clutter.
But as someone who’s investing with a 20–30 year horizon, I’m wondering how this advice holds up in real-world scenarios, especially for those of us who want to take opportunistic exposure to thematic, cyclical, or sectoral funds, or even gold funds during favorable phases.
My questions:
1. Do experienced investors actually rotate out of thematic or short-term funds regularly to stick to the 5-fund limit?
2. Or is it reasonable for a fund count to grow over time, especially for long-term investors following tactical asset allocation strategies?
3. Is the “5-fund rule” more about simplifying core holdings (like large-cap, flexi-cap, hybrid, etc.) while allowing some room for tactical satellite funds?
4. I’m trying to understand whether I’m misinterpreting this rule as too rigid. Should the focus be more on portfolio structure and clarity rather than the number of funds per se?
Would love to hear from long-term investors or advisors, how do you manage diversification vs. complexity in your mutual fund portfolio over decades?
Advice by Rajani Tandale, Senior Vice President, Mutual Fund at 1 Finance
The commonly cited “5-fund rule” in mutual fund investing is primarily meant to encourage simplicity, avoid portfolio clutter, and reduce unnecessary overlaps. However, for long-term investors – especially those with a 20- to 30-year horizon – the rule need not be interpreted rigidly. In fact, even fewer funds may suffice. A well-diversified portfolio can often be built with just 2 to 3 mutual funds, provided each fund is broad-based and managed effectively.
When we talk about tactical asset allocation, it doesn’t necessarily mean adding multiple equity mutual funds with overlapping strategies. Rather, it refers to consciously allocating across major asset classes – such as Equity, Fixed income/ Debt, Real Estate Alternatives (like Gold ETF/ Silver ETFs), and sources of passive income like REITs etc. – based on goals and market conditions. Within equities, mutual funds remain one of the best investment vehicles for long-term investors.
A well-managed flexi-cap fund, for example, provides the fund manager with the freedom to navigate between large-, mid-, and small-cap stocks depending on market cycles and sector opportunities. This allows investors to avoid the complexity of trying to time the market themselves or rotate between sectoral and thematic funds – something even professionals struggle to do consistently.
For those who prefer simplicity and transparency, index funds such as Nifty 50, Nifty Next 50, or Nifty 500 are ideal options. Data over the past decade consistently show that many active funds fail to outperform their benchmark indices over the long term. Investors often switch between active funds in search of better returns when performance dips, which leads to suboptimal outcomes. Index investing encourages discipline by minimizing such reactive behavior, allowing compounding to work uninterrupted. In fact, this passive approach is widely preferred in mature markets like the U.S., where a significant share of investments flow into index-based strategies.
Too many funds isn’t diversification
Having too many funds doesn’t necessarily enhance diversification. In reality, a good flexi-cap fund already provides exposure across market caps, sectors, and themes. Most of the industry’s assets under management are concentrated in the top 50 to 100 stocks, which further limits the benefits of owning multiple schemes.
For the fixed income component, investors can consider debt mutual funds or bank fixed deposits, especially for short-term goals, emergency funds, or maintaining a balance in asset allocation. For alternative investments, gold and silver ETFs offer ease of access and liquidity, while exposure to real estate can come through direct property ownership or Real Estate Investment Trusts (REITs).
Ultimately, it’s not about how many funds you hold, but how thoughtfully your portfolio is structured. A small, well-chosen basket of funds, aligned to your asset allocation strategy, risk tolerance, and financial goals, is more effective than chasing every new theme in the market. The focus should be on clarity, long-term consistency, and minimising behavioral mistakes, not just counting the number of funds. Starting early is key; consulting a qualified financial advisor can help you build a clear, disciplined strategy and stay on track throughout your financial journey.