How many mutual funds are enough for a diversified portfolio

When it comes to mutual fund investing, many investors assume that holding more schemes automatically means better diversification. However, financial planners say that beyond a point, adding more funds can lead to duplication rather than true diversification — and may even hurt long-term returns.

According to Aditya Agarwal, Co-founder of Wealthy.in, most equity mutual funds already hold between 40 and 100 stocks.

“When investors add too many funds, they often end up holding the same stocks through different schemes. This duplication does not reduce risk — it only complicates tracking and can dilute returns,” Agarwal explained.

He added that over-diversification can make a portfolio harder to manage without meaningfully lowering volatility. Instead, investors should focus on holding a few well-chosen funds that represent different market segments.

How many mutual funds are enough?

Agarwal outlines an approximate guide based on portfolio size:

For portfolios up to ₹25 lakh

Three to four funds are generally sufficient. A balanced mix could include one large-cap, one mid-cap, one flexi- or multi-cap fund, and optionally a hybrid or debt fund for stability.

For portfolios around ₹50 lakh

Four to six funds may be adequate. Investors can include one fund each from large-, mid-, and small-cap categories, along with a flexi- or multi-cap fund and a debt or hybrid fund for balance.

“Avoid holding more than two funds in the same category — like two large-cap funds — as this leads to overlap,” Agarwal advised. “Instead, consider a large & mid-cap or focused equity fund for additional growth potential.”

For portfolios of ₹1 crore or more

Even larger portfolios rarely need more than 8-10 funds. Diversification across large-, mid-, small-, and multi-cap funds, dynamic asset allocation or multi-asset funds (for gold or silver exposure), and one or two international funds can offer global balance.

“Beyond 10 funds, the added complexity offers little benefit,” Agarwal noted.

How to detect duplication across funds

Agarwal suggested that investors should periodically check for hidden overlap by reviewing fund factsheets.

“Look at the top holdings and sector allocation. If you see the same companies or industries appearing repeatedly, that’s a sign of duplication,” he said.

He also recommended regular monitoring, especially after adding new investments or rebalancing. This ensures that the overall portfolio remains diversified and avoids unintended concentration in specific stocks or sectors.

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