What is the maximum amount I can invest in a single mutual fund?

Published: May 28, 2022 at 6:00 am

A reader asks, “I wonder if you can write a blog post on the Risk of fund house concentration in one’s investment portfolio. I am a follower of Freefincal Finance university and use Robo Advisory to manage my investments. Hence you can assume that I follow asset allocation as prescribed by the tool, and invest sufficient money with a balanced view on returns (8.5%) and Inflation (7%)”.

“Currently I invest in PPFCP, Mirae Asset Emerging blue-chip fund for all my needs under different folios both in my name and my wife’s name. For debt components, it is largely PPF, EPF and PPCHF. No other debt funds for any long term goals. The emergency fund is parked in the Baroda liquid fund”.

“Now the overall corpus has grown to about 50 lakhs in Mutual funds spread across the schemes mentioned above ( PPFCF ~ 20 lakhs, Mirae ~ 21 lakhs, PPCHF ~ 10 lakhs). All investments were made through SIP over the last 3 years. If I continue this journey, It is likely that over the next 5 years each of these funds would likely swell up to 50 lakhs each. Is this very risky? This question came up after the Axis MF front running scandal”.

“Please consider writing an article on how one should diversify across fund houses or in other words What is the maximum investment amount I can keep in a single fund ( across all folios ). Thanks”.

unfortunately, the answer is subjective. What I am comfortable with, may not be suited for you. About 55% of my equity MF retirement portfolio is in Parag Parikh flexicap.

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If you had asked me ten years ago, I would have said 55% is a bit too much, but over time our risk appetite changes.

If I am however not a fan of investing in different folios of the same active fund. If the fund underperforms then all goals will be affected.  Might as well hold different funds for different goals and this naturally reduces the concentration risk of the overall portfolio.

I have seen investors with a much large portfolio than mine with a much smaller exposure per fund. The downside of this is the portfolio will have 15-20 or more funds. They are okay withholding so many funds so who are we to comment!

In our opinion, a portfolio of 2-3 funds per goal is enough to reasonably reduce AMC risk. Yes, with time the weight of each fund will increase. It is best to gradually get used to this.

If we set hard rules like 10% of the portfolio per fund or Rs. 25 lakhs per fund, it would become cumbersome to manage the portfolio with time. But being personal finance, to each their own. While we do not recommend it, if such rules make you sleep better at night then it is worth it even if the overall portfolio would start resembling an expensive index fund as the number of funds increases!

A related question is, “I invest only in Nifty and Nifty Next 50″. Is one fund per index enough?” Depends on your comfort level. If you hold one fund and the AMC doubles the TER or If the tracking error suddenly increases, then your entire portfolio will be affected. Maybe holding two funds per index is not a terrible idea.

If personal finance is personal then so is simplicity. We have to develop our own rules and live or die by them.

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