Why More Than One Fund is Necessary

Investing in mutual funds is easy, but investing in just one fund has one huge disadvantage: fund manager risk. The best fund managers are not foolproof, and when you invest in just one, you put your entire portfolio at the mercy of that fund manager. Investing in several funds can reduce reliance on any single fund and diversify your risk.

 

How Many Funds Are Enough?

Contrary to popular belief, having a large number of funds does not necessarily make one's portfolio better diversified. Too many funds with similar holdings contribute to a bloated portfolio with little added benefit.

Most investors do well to own 3–4 good funds. Anything more usually sees diminishing returns. That's because most funds of the same type have portfolios that significantly resemble each other. This is because fund managers chase generally accepted valuation measures that mirror each other in portfolio weights.

 

Diversify Across Different Fund Categories

For better diversification, you need to pick funds from different categories. Each one has exposure to unique market segments that help properly balance risk and return. Equities belonging to different sectors and company sizes normally perform differently at various times.

It makes much sense for you to balance risks and your overall portfolio by bringing balance. Here are four fund categories you can invest in:

 

1. ELSS Fund

ELSS funds are equity funds that allocate a significant amount of their assets to equities or equity-related products. This should be the core of your portfolio. ELSS funds save you taxes under Section 80C of the Income Tax Act and act like multi-cap funds, which invest across companies of all sizes.

 

2. Aggressive Hybrid Fund

Earlier referred to as balanced funds, they invest at least 25% of their assets in debt securities. This offers exposure to a mix of equity and fixed-income investments. This balance adds stability to your portfolio while still offering growth potential.

 

3. Multi-Cap Fund

Multi-cap funds are flexible in their investment approach since they invest in large-cap, mid-cap, and small-cap companies. This flexibility ensures that your portfolio has a mix of companies with different sizes and sectors, maximizing opportunities and minimizing risks.

 

4. Large and Mid-Cap Fund

These invest in the top 200 companies of India, combining the stability of established large-cap companies with the growth potential of emerging mid-cap firms.

 

Conclusion

A diversified portfolio doesn't mean owning an endless list of funds; rather, consider 3–4 funds across different categories that will cover various market segments. This would be a structured approach to ensure adequate diversification while avoiding the noise of a messy portfolio.