Is something wrong if I hold 25 mutual funds?

Published: November 18, 2022 at 6:00 am

A reader asks, “I recently asked the members of a personal finance forum to review my  25 mutual fund portfolio. Everyone said that I held too many funds and that my portfolio resembled an expensive index fund. Is it wrong to hold that many funds? If so, what should I do?”

They are right in saying that you are holding an expensive index fund portfolio. However, we believe that you are asking the wrong question here. The number of funds you hold matters little. We suggest you ask these questions first:

  • What am I investing for?
  • When do I need the money?
  • Do I have an investment strategy in place to address this need?
  • Do I have a suitable asset allocation to balance risk-associated reward and stability?
  • Do I appreciate the basics of portfolio management?
  • Am I going to rebalance my portfolio once a year, or am I going to rebalance it when the asset allocation deviates by a certain amount (say 5%)
  • How am I going to diversify my equity and fixed income portfolios?
  • How many products are necessary to achieve this diversification?
  • Am I going to be an active investor and try to beat the index with my choices, or am I going to be a passive investor?
  • If I  am an active investor, how long will I wait for a fund to beat the index?

If you need help, try this free e-book: Re-assemble Step by step money management basics. Once you find acceptable answers, you can address the following questions about your MF portfolio.

Why did you end up with 25 mutual funds?

  • Did you take the advice of an automated service?
  • Did you see the “top funds” listed in a portal or news media article?
  • Did the fund’s recent performance sway you?
  • Did the fund’s marketing material convince you to buy?
  • Can you measure the impact of each fund on your overall portfolio’s risk and reward?
  • Can you not achieve the same result with a lesser number of funds?

You asked a forum’s opinion about your MF portfolio because your instincts likely said something was wrong. My point is you need to ask, “have you been investing with a plan so far?”

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If the answer is no, you must first design a personalised investment plan. This is a higher priority than the number of funds you hold. I know many investors who hold more funds than you have. They sleep tight because they have a robust investment strategy in place. Every human has their own quirk, and holding less or more funds is one of them. That is of secondary importance.

We, therefore, recommend that you address the bigger problem at hand. Once you have this investment plan, you can decide what to do with your 25 holdings. Whether you call it diversification or diworsification is up to you.

  • Do you wish to reduce the number of funds?
  • Will you continue this behaviour and acquire every shiny object you encounter?

Our recommendation is the following:

  • Do not worry about the number of funds now. Focus on the asset allocation and how much you need to invest for your future need. Track if you can invest this much each month. See 11 years of tracking investments: A life and game changer.
  • If you cannot DIY this, seek immediate help from our list of SEBI registered fee-only advisors.
  • To reduce the number of funds (if that is what you want to do)
    •  Decide if you wish to be an active MF or passive MF investor. Passive investing is the way to go if you have just started investing.
    • If you already hold some Nifty or Sensex passive funds, then direct your investments to those.
    • If some of your funds are in “red”, sell them (except, of course, the Nifty/Sensex funds!)
    • No, don’t think. Just sell.
    • The rest you can gradually cull during rebalancing events.
    • If you wish to be an active MF investor, direct your investments to an aggressive hybrid or flexicap fund (if you hold them). Just be prepared that today’s stars will become the average performance of tomorrow and vice versa.
    • The final number of funds you wish to hold is up to you. It can be 1/3/10/25. Personal finance is personal, Just that there ought to be a method to the madness. To convince ourselves. No one else.

What matters more is that you stick to your plan and do not buy any more funds! There is no place for shiny object syndrome in an investment portfolio.

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Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
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