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How many mutual funds do you own right now?
Five? Ten? Maybe even twenty?
Most investors believe the more funds they hold, the safer their portfolio is.
After all, diversification reduces risk, right?
But what if too much diversification ends up hurting your returns instead of helping them?
What if your “variety” of funds is just different wrappers around the same handful of stocks?
Let’s break down why owning too many funds can backfire — and how to find the right balance between diversification and duplication.
Table of Contents:
- The Diversification Dilemma: When Safety Turns into Chaos
- The Hidden Cost of Over-Diversification
- The NFO Trap: Why “New” Doesn’t Always Mean “Better”
- Beyond Categories: Understanding Fund Styles
- How Many Funds Do You Really Need?
- Mutual Funds: Still One of the Best Wealth-Building Tools
- Final Thoughts: Simplify to Multiply
1. The Diversification Dilemma: When Safety Turns into Chaos
Meet Rohit Mehra, a 36-year-old IT professional from Pune.
He started with one fund — the Nippon India Large Cap Fund.
When markets turned volatile, his returns dipped, and a friend advised him to “diversify.”
What followed was a classic investor mistake.
Within three years, Romit owned 18 mutual funds across every possible category — large cap, small cap, value, ELSS, even thematic ones.
But when he checked his performance, he realized something shocking: his returns were barely higher than a simple Nifty 50 Index Fund.
Why? Because most of his funds owned the same companies — Reliance, HDFC Bank, Infosys — just in different proportions.
His “diversified” portfolio was really a duplicate portfolio.
2. The Hidden Cost of Over-Diversification
Another investor, Kapil Sharma, went even further — he owned 28 funds through SIPs.
His logic was simple: if one fund fails, others will protect him.
But when markets dipped in 2022, every fund fell together.
After consulting a financial planner, Tejas trimmed his portfolio down to six funds — two flexi-caps, one mid-cap, a hybrid fund, a short-duration debt fund, and a gold ETF.
The result?
Simpler tracking, better performance, and peace of mind.
The truth is, when your portfolio is spread across too many funds, no single winner can make a meaningful difference.
You end up with index-like returns, but with higher costs and confusion.
3. The NFO Trap: Why “New” Doesn’t Always Mean “Better”
New Fund Offers (NFOs) often lure investors with a low ₹10 NAV, giving the illusion of being “cheap.”
But unlike IPOs, a fund’s NAV doesn’t reflect its true value — it just represents the starting price of its units.
Experts warn against this trend.
In 2024–25 alone, over 240 NFOs were launched, mobilizing ₹1 trillion — most of them thematic or sectoral funds.
Many of these have already underperformed their category averages.
It’s not that new funds can’t perform.
It’s just smarter to wait for a track record rather than jumping in based on hype or brand names.
4. Beyond Categories: Understanding Fund Styles
Diversifying across market caps (large, mid, small) is a good start, but it’s not enough.
Many investors overlook investment styles — growth vs. value.
Two funds can belong to different categories but behave the same way if both chase high-growth companies.
This means they rise and fall together.
As Akhil Chaturvedi of Motilal Oswal AMC puts it:
“True diversification isn’t about the label. It’s about how those funds are managed.”
A balanced portfolio blends growth-oriented funds (forward-looking, higher risk) with value-oriented ones (stable, proven performers).
That mix ensures smoother performance across market cycles.
5. How Many Mutual Funds Do You Really Need?
There’s no magic number that fits everyone, but most financial planners agree that 3 to 6 mutual funds are enough for a well-rounded portfolio.
The goal is to keep it diversified yet manageable, not scattered and confusing.
Here’s a simple structure you can follow:
| Goal Type | Recommended Mix |
|---|---|
| Short-term (≤3 years) | 1 hybrid mutual fund + 1 short-duration debt fund + optional gold ETF |
| Long-term (5–10+ years) | 2 diversified equity funds (flexi/multi-cap) + 1 mid/small-cap + optional global equity fund + gold ETF (≤10%) |
Each fund should have a distinct purpose—one offering stability, another focusing on growth, and one balancing the two.
If two funds are doing the same thing, you’re not diversifying—you’re duplicating.
For example, holding multiple flexi-cap funds doesn’t add value; it just increases overlap and confusion.
6. Mutual Funds: Still One of the Best Wealth-Building Tools
Even with the rise of REITs, AIFs, and digital assets, mutual funds continue to be one of the most trusted and efficient ways to build wealth in India.
Their accessibility, professional management, and power of compounding make them suitable for both first-time investors and experienced professionals.
You don’t need huge capital or market expertise—just consistency and discipline.
The key is to choose wisely, invest regularly, and review periodically.
Don’t collect funds like trophies; build a focused portfolio that grows with your goals.
Final Thoughts: Simplify to Multiply
Real diversification means clarity, not clutter.
By focusing on a handful of well-chosen funds, you give each the power to make a difference — instead of spreading your potential too thin.
Before you rebalance or reduce your funds, consider consulting a Certified Financial Planner (CFP) who can align your investments with your goals, risk profile, and time horizon.
Because at the end of the day, the goal isn’t to own more funds — it’s to own the right ones.
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