Every mutual fund scheme serves some purpose and investors use them in different ways that give them utility. Therefore, from an individual investor’s perspective, it becomes important to know how many schemes he should have in his portfolio.
According to us, your portfolio should be short and simple. Many of us do not follow an organised approach while investing in mutual fund and end up holding funds that neither gives you the required diversification nor the required returns. Some even drag your entire portfolio. If you are just looking for diversification, a single fund can also provide you the required diversification while in some cases, even investment in five funds cannot give you the desired diversification as all the funds might be focussed in a single sector or market cap.
Therefore, before deciding on the number of funds, you should decide on three key aspects of your investment, namely, your financial goal, time horizon, and risk-taking ability. To make a good portfolio, we believe you should have a maximum of eight mutual fund schemes.
One large-cap fund. You can choose an index fund for this. This index fund should have a lower tracking error and expense ratio.
Two mid-cap and small-cap dedicated funds. Mid-cap and small-cap funds have a higher risk and hence, it should be well-diversified.
One or two debt funds. Debt funds act as a portfolio stabiliser and you should have at least one debt fund. You should choose the category in a way that must depend upon the interest rate environment. In a falling interest rate scenario, you should go with long-duration funds and vice-versa.
One sectoral fund. This helps you to lift the return of your entire portfolio. In the current situation, IT and Pharma funds are doing well, and hence, one can hold them.
The above number is not cast in stone. You can have one or two more or less, however, you should be well aware of the ultimate purpose of your investments.