How many mutual funds should I hold?

Most freefincal readers would be familiar with this question and perhaps more familiar with the answer – do not hold more than 3 or 4 funds. More funds do not mean higher diversification!

So why bother writing another post on this?

In academia, we have a saying: there is no such thing as a dumb question but there is definitely such a thing as a dumb answer!

When it comes to personal finance, perhaps the more appropriate adage is, ask a piece-meal question, you get a generic answer. Ask a holistic question, you get a holistic answer.

“Do  not hold more than 3 or 4 funds. More funds do not mean higher diversification” represents a generic answer to a generic question.

Since personal finance is excessively personal, asking generic questions and taking the ensuing generic answers seriously is waste of time and effort.

So most often, the trouble is with the question.

‘Which is the best health insurance plan?’ is a generic question.

‘Which is the best health insurance plan for me?’ is a holistic question.

‘Experts’ and enthusiasts most often deal with generic questions all the in the name of financial literacy.

Only the individual in question can answer holistic questions!

So what is the holistic question in this case?

To answer this, let consider  the case of Calvin's dad who works as a patent attorney.  His Son Calvin is a 6 year old (with a certain stuffed toy!).

Calvin's dad, let us call him Bill(!), started investing for retireDadment about 12 years ago via SIP in a diversified equity mutual fund. After Calvin was born, that is six years ago, he double the SIP amount to fund Calvin's education.

Calvin will finish school after about 11 years, while Bill will retire after 20 years.

Bill believes a single mutual fund is enough to serve as the equity component for both retirement and Calvin's education.

He expects 12% returns for his retirement goal and 10% for Calvin's education.

First, here is a question for you: How much should Bill withdraw from the fund when (that is a little before) Calvin finishes school? The idea here is withdraw for Calvin's education without touching the retirement corpus.

Catch my drift?

Now, what is the holistic question that involves the number of mutual funds one should hold?

Crude version of the holistic question: Bill should ask himself, I have two long term goals: my retirement and Calvin's education. How many mutual funds should I hold?

Let us try to answer this:

To simplify things, let us assume a single equity oriented balanced mutual fund is enough to build a diversified portfolio for long-term goals.

Bill retirement and Calvin's education are events that are expected to occur 9 years apart in time. That Calvin will graduate after 11 years and Bill is slated to retire after 20 years.

Let us first recognize that long-term or short-term, the risk-profile of the goal

  • how important is it?
  • how far away is it?
  • what is the reasonable rate of return expected from a diversified portfolio? Etc.

is more important than the risk appetite of the investor

  • how much risk can Bill stomach?
  • Does he understand how equity holdings compound? and the typical kind of psychobabble used for risk profiling!)

Should Bill assume that the risk-profiles of the two goals, that differ by almost a decade in tenure, to be similar and use the same mutual fund for both goals?

Should bill use the same asset allocation (equity:debt ratio) for both goals?

Assuming the risk-profiles are similar (they are not!), what if Bill chooses to increase the monthly investment amount for each goal each year? What if this percentage increase is different for different goals?

Would it become easier to evaluate how much Bill should withdraw?

What if Bill had chosen to use 2 equity funds and 2 debt funds for retirement and chose to contribute more in each of these funds for Calvin's education? He adjusts the contribution amount to initially match the asset allocation for each goal? Would it now become easier to evaluate how much Bill should withdraw?

Bill would then like to rebalance each year to ensure the asset allocation for each goal does not deviate too much from his original plan.  Can you please chalk out a way in which Bill can rebalance? Is rebalancing easier with fewer funds? Note that the idea here is to rebalance without mixing the corpuses!

I have assumed Bill never  changes his funds. Would it make things easier if fund changes are included?

Well, enough fooling around. Let us get to the central issue.

Exact Version of the holistic question: Assuming Bill builds a diversified equity portfolio with say, 3-4 mutual funds, can he use the same funds for all his long term goals? Or should he have separate portfolios for each long term goal with a few funds in each folio?

  • Can Bill use the same portfolio for all long term goals so that the number of funds is kept to a minimum? This way, can he ensure that he does not mix the corpuses during rebalancing and the final withdrawal?

YES. Of course he can! Only because anything is possible! Would take some doing though. If you answer the above questions, you can check for yourself how easy it is!

  • Is it practical to use the same funds for all long term goals just to keep the number of funds small so that it is 'easier to manage'?


Put yourself in Bills shoes and seek your own holistic question first and the seek the holistic solution.

As for me, I have 3 long term-goals: retirement, my son education and his marriage. Each of them have different tenures, different return expectations and therefore different asset allocations.

I use separate mutual fund portfolios for each of my goals. This makes it easier to know the corpus value, net folio returns, rebalance etc.

I use the automated mutual fund and financial goal tracker to check my holdings and net portfolio returns.

People say it is tough to manage multiple funds. I don’t know what the fuzz is all about. Choose funds with a long history of decent performance and give it at least 5 years to perform. Don’t be worried about short term performance and stay invested. Monitor frequently but do not act unless absolutely required.

So far the only redemptions I have made are from ELSS holdings done years ago and for rebalancing. It takes less than 20 minutes to invest in them each month. If you are running a SIP, you save on that as well.

I review a fund with the automated rolling returns calculator or mutual fund returns analyzer only if there is a significant drop in performance. Even then, if the fund is doing well wrt to its benchmark and I have faith in the fund managers ability, I have done nothing (for e.g. see review on HDFC Top 200). The equity portfolio overlap checker helps me keep my portfolios reasonably diversified.

As far as I am concerned, dedicated portfolios for long-term goals is far more hassle-free. I know exactly how much to rebalance each year and withdraw from a corpus when the goal is due!  I get a clear picture of the net portfolio growth and take corrective actions as and when necessary.

If we use the same funds for all goals, then the fate of all the goals hinge on the same funds. If each goal is separated by several years can you find anything smart about such a strategy?

Confusing a generic answer with a holistic one is injurious for fiscal health. It is not about the number of mutual funds that one should hold. It is about the number of long term goals that one has, and seeking out the most efficient way to manage them.

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18 thoughts on “How many mutual funds should I hold?

  1. Praveen

    I absolutely disagree with the arguement that one should not hold more than 4-5 funds in his category. Most of the gurus advise to hold 4-5 funds - one from each of the category - Large/Large&MidCap/Multi-Cap/Mid&Small-cap.

    I just did performance analysis for Large & Mid cap funds over 5 & 10 years period - only for 5 & 4 star funds.
    The respective return for the top and lowest among these funds was astonishing. Over 10 years - The top fund ICICI Pru Dynamic was giving 22% while lowest among these - HSBC Opportunities was giving 15 %. Similarly for 5 year duration - the returns are 20% and 15% respectively.

    If I happened to choose just one fund (say in Large & Mid cap fund category)- and over the years if that fund turned out to be bad performer then it will take toll on my portfolio. Rather if I had taken 2-3 funds in that category I would be protected from such eventuality and it would be proper risk diversification.

    1. pattu

      I can't agree with you here. I think one or at best two funds in each category is all that one should have PER goal. Anything more that could dilute returns. Different funds perform to different degrees at different stages. As long as we pick a fund with impressive track record and stick to it, I think we should be fine. Changes should be made only if there is prolonged non-performance.

  2. Guru

    Pattu Sir,

    any specific reason for exiting the ELSS's?

    I have HDFC, Reliance and DSPBR ELSS SIP's. they have between them less than 30% overlap. (overlap calculator tool) they are performing pretty well (upwards of 13% CAGR), though the SIP value is fairly small 1k each, running for last 5 years.

    I am practicing the idea of dedicated portfolio's for dedicated goals, have created two portfolios for my kids education with two funds each. Hope it works 🙂

    1. pattu

      I am not a fan of ELSS funds because of the lock-in. Each SIP can be redeemed only after 3 years. So one cannot pull out if the fund underperforms. Down the line I suggest you shift the SIPs to other funds. Dedicated portfolios are simpler. I see no reason why they wont work.

    1. pattu

      I considered this possibility with a couple of examples. The only way it will work easily is when investments for both goals begin at the same time, remain at same proportion and happen on the same day. Only then can I easily estimate the withdrawal amt. Otherwise I will have to calculate how much the corpus has grown for each goal with individual investments to find out how much to withdraw. Not difficult but a pain and most people will end up withdrawing some money from the other goal.

  3. Ashok

    Dear Pattu,

    First of all thank you very much for all these valuable articles and tools. I have been a passive reader of this forum for a couple of months now and thanks to you and a couple of other bloggers, I am convinced and have decided to take the plunge in the world of mutual funds to save for my long term goals. It would be great help if you can review my investment plan. With a medium risk profile, I intend to invest in the following funds for a period of 15-20 years in SIP.

    5K per month in each of these 4 funds: UTI Equities fund, Birla Sun Life Frontline Equity, ICICI Pru Focussed Bluechip, Quantum Long-Term Equity

    5K per month in each of these funds: HDFC Mid-cap Opportunities Fund, Franklin India Smaller Companies Fund

    10k per month in each of these funds: HDFC Children Gift Fund - Investment - Direct Plan,
    ICICI Pru Balanced Fund

    Can I go ahead with this portfolio? And should I start now or wait until the election results are announced? Please advice.


    1. pattu

      Hi Ashok, Thanks. Good to know you are ready for MFs. You start your sips right away. Please do not invest in so many funds.
      I would prfer QLTE and Franklin Blue Chip for large caps
      ICICI Pru Discovery HDFC Mid-cap , PPFAS LTVF, Frankin Prima for small and mid caps
      HDFC Balanced for a balanced funds

      The HDFC Child fund has some restrictions you need to be clear about. Otherwise it is a good fund.
      I don't like the long term performance of UTI Equity and not too impressed with ICIC Balanced (although it is not bad).

  4. Ashok

    Hi Pattu,

    Thank you for your kind review. I will adjust my portfolio with your suggestions and visit the AMC offices in Chennai for direct investing.

    Kind regards,

  5. Mohamed Rafi

    Hi Pattu, Is the Indian Mutual funds are interest based investment? Is that particular fund or Fund company provide any interest to that fund to raise the capital value. Please let me know

  6. sandy

    hi Pattu,

    I am investing total of 30k since jan 2012 in following,

    Hdfc Balanced Fund- G (13K)
    Franklin India Blue Chip-G (12k)
    HDFC mid-cap Opportunities-G (5k PM)

    Does this look like a good stream of SIPs. I am 33 & have an ~3K emergency fund kept in SBI Maxgain. No big goal atleast 12-15 years (coinciding by my daughters 9th-10th Standard)

    A term insurance in place for 75L & 5 Lac HI.


    1. freefincal

      I do not offer specific financial advise. If you wish to DIY, confidence to act alone is mandatory. Else one can always consult a fee-only planner.

  7. Divya

    Hello Pattu Sir,

    I have a query. I have 3 financial goals and have invested in 6 funds (Not a very smart thing to do. I know and just realized it). The idea was to assign two funds to each of my goal. All the goals are minimum 20 years away. The break up is- hybrid-18%, large and midcap-18%, mid and small cap - 21%, multicap-18%, Small and midcap- 15%,large cap-9%. I have been investing through SIP in these funds only for the past 6 months. ( I am a newbie :-/). I am confused about the following
    1. Should I stop SIP in so many funds and just choose three or four funds. In that case any suggestions on how to consolidate the above?
    2. I am anticipating that I will be able to add some additional amount to my MF saving for the next 2-3 years for the same goals through SIP and Lumpsum. In that case, in which of the category should I put in the additional amount. Any suggestions? I am following the 60:40 in Equity-Debit portfolio.
    3. Since, I have been investing only for 6 months, I am planning to anlayze the funds only after a year and give it a minimum 4 years time before thinking of re balancing/shifting to better performing funds. Is that approach ok?

    I used the step-by-step guide to choose the funds.

    It will be great if you can give me your inputs on this. I am confused and looking for some direction.

    Thanks so much.!

  8. Raj Mehta

    Simply wow.. Before reading this I was very much confused relating to how many mutual funds should I actually have but you have made it so simple by giving such important information to us in this article. Especially the examples provided by you were phenomenal.

  9. Nigel

    Pattu Sir, Amazing content here. I was just reading your past posts and found this amazing article.

    Similar follow-up question to the gentlemen above,
    -What are your views of having 10-15 yr SIP.
    -What should be one's action be if the MF is not performing, it is best to stop the SIP and get into another analysed MF and start SIP of the new MF.
    -What about Long term Capital Gains?.
    -When should be the ideal portfolio rebalancing or analysing be done; Annual, 6 mth or
    -Does long term capital gains tax gets affected if rebalancing done less than 1 yr.

    Would love to hear your insights.. Thanks

    1. freefincal

      Thank you. Sorry, your questions are quite vague. Please see my posts on how to review a portfolio and a sip.


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