Building Wealth Through Focused Mutual Fund Selection

You’re at a wedding buffet with a spread of dishes, and the temptation to try everything is real. But if you fill your plate with too many items, the flavours start overlapping, and you might not enjoy any dish fully. Mutual fund selection works much the same way. Let’s break down how many is just right and why going overboard may not help.

1. Why People Collect Too Many Funds

Many investors buy new funds each time they hear of the latest ‘winning scheme’, thinking it brings more variety, reduces risk, and boosts returns. It feels like owning more will somehow balance your portfolio better, but the truth is a little different.

• Fear of Missing Out (FOMO): New launches, top-performing funds, and recommendations from friends or social media can make you feel you’ll lose out if you don’t join in.
• Mixing Professional Advice and Social Tips: You may have funds suggested by your advisor and others from friends, brokers, or relatives.
• Chasing ‘Best’ Returns Every Year: Switching or adding funds based on latest performance is common, but it can actually lower your average returns and bloat your portfolio.

2. The Downside of Too Many Mutual Funds

Having a big basket of funds doesn’t always mean better diversification. Sometimes, it just means more paperwork, confusion, and hidden overlaps.

• Overlap: Many equity funds tend to own the same top stocks like HDFC Bank, Reliance, Infosys, etc. The more funds you own, the more likely you’ll end up owning the same companies many times over. This isn’t real diversification.
• Diluted Returns: When you spread your investments across too many similar funds, you lower the impact of any single fund’s performance. It’s almost like watering down a strong cup of chai.
• Difficult Tracking and Review: If you have ten or more funds, reviewing each one’s performance and rebalancing becomes cumbersome. You may lose track of why you bought a fund in the first place.
• Missed Tax Optimisation & Rebalancing: More funds make tax planning and asset allocation reviews a bigger task than it needs to be.

3. What Diversification Really Means

Diversification is spreading investments to reduce risk, but it’s not about the number of funds alone. Good diversification comes from having the right mix across types, styles, and asset classes not owning every variant in the market.

• Diversify By Type: Have a mix of large cap, mid cap, and hybrid funds, if it matches your objective. Don’t own five different large cap funds which all own similar stocks.
• Diversify for Your Goal: If you’re saving for a child’s education, a retirement fund, and short-term expenses, each can have its own focused fund or two.
• Touchpoints Without Clutter: Two or three funds in each asset class or sub-goal usually does the job. For most equity-focused growth investors, 3-5 well-chosen funds are enough.

4. How Many Funds Is Enough?

Now let’s answer the practical question what’s a good number?

For most investors, 3 to 6 mutual funds are quite sufficient. Here’s a typical breakup for an equity-oriented portfolio:

Purpose	Fund Type	Recommended Number
Core Growth	Large Cap or Multi Cap	1 or 2
Aggressive Growth	Mid/Small Cap	1 or 2
International Choice/Thematic	International Fund/Thematic fund	1
Stability/Balanced	Hybrid or Balanced	1

This keeps things simple, manageable, and effective. It helps you diversify across company sizes, sectors, and geographies without holding a cricket team full of funds. If you add debt or gold funds, keep similar logic.

5. Factors to Think About

Consider these points before adding or removing funds:

• Your Investment Goals: Each long-term and short-term goal should have a clear fund backing it. Don’t add a new fund unless you’re adding a new, genuine goal.
• Your Ability to Track: More than six funds? It becomes hard to monitor all of them well.
• Fund Type Overlap: Use online tools or ask your advisor to check if the funds you hold are investing in mostly the same stocks or sectors.
• Past Returns Are Not Everything: Don’t switch only because last year’s winner is this year’s laggard. Fund performance rotates, but a well-chosen set lasts long.
• Tax Implications: Redeeming old, low-performing funds may have tax, exit load, or lock-in consequences, so factor those in.

6. When Do You Need More Than Six Funds?

There are some exceptions. Large portfolios, trusts, or family offices may need extra funds to diversify across specialised categories like thematic funds or global sectors. Ultra high net-worth clients might also split investments for regulatory or manager-specific reasons. But for most individuals and families, keeping it to 3-6 is both practical and optimal.

7. Mistakes to Avoid

• Owning five funds of the same type.
• Changing your lineup every year.
• Buying NFOs (New Fund Offers) just for the sake of novelty.
• Ignoring tracking error and overlap.
• Getting stuck in legacy funds from old recommendations, without review.

8. Smart Ways to Organise Your Fund Selection

• Define Each Fund’s Role: Each fund in your portfolio should have a role core, satellite, international, safety, etc.
• Use Portfolio Trackers: Online apps and platforms now allow you to see overlaps and performance at a glance. Use them once every quarter to reassess.
• Avoid Clutter: Remember, every fund needs your attention, paperwork, and tracking. Stick to those that add genuine value.

9. Building Wealth, Step by Step

Investing is like building a house don’t buy every brick you see. Buy the right ones, place them well, cement with discipline, and watch wealth build slowly but steadily.

To Sum Up

Owning the right number of mutual funds can bring both focus and balance to your portfolio. For most investors, holding 3-6 carefully chosen funds lets you get the benefit of diversification, while keeping things clean and easy to manage. Avoid the urge to collect funds without reason. Take time once every year to review your portfolio, weed out duplication, and realign your investments to your goals.

You can use this advice by first doing a ‘mutual fund spring cleaning’ list all your funds, check for overlaps, and ask yourself for each one: does it add something unique? Consider trimming where there’s duplication. Use online portfolio tools or talk to your advisor to help you get this done. When your portfolio is lean, you’ll track it better, sleep easier, and give your wealth a better chance to grow.