What Amount of Funds Are Necessary for a Diversified Financial Portfolio?
Spread your investment eggs wisely, mate. Don't sink all your dough into a single basket. That's a risky move! You gotta diversify, and here's why:
Investing in more than one fund is crucial, but remember, a messy portfolio filled with numerous funds isn't efficient. It's a pain in the arse to keep track of and manage.
So, how many funds should you invest in? Well, a rough estimate is to have between 3 to 4 funds in your portfolio, but let's delve deeper.
Investing in Multiple Funds - The Why and The How
Yeah, most mutual funds are diverse, but sticking all your cash in one fund means you depend on the decisions of a single fund manager. That's singing the fund manager risk blues, mate, and it ain't pretty. Even the best fund managers can make errors, and that can hit your pocket hard.
Now that we've established the necessity of multiple funds, let's talk about the right number.
The Right Number of Funds - Not a Biggie
A crucial point to remember: More funds in your portfolio doesn't automatically mean increased diversification. A portfolio with 15 funds that invest in similar stuff isn't diversified.
Having 4 funds in your portfolio is ideal. You don't gain any extra diversification by tossing more money into a bunch of funds. That's because most funds within a category invest in the same stocks, so investing in more funds just means you're loading up on the same stocks via different funds.
Diversification 101 - Picking Funds from Different Categories
It's wise to pick funds from different categories. Why, you ask? Because you get exposure to different areas of the market. Since stocks of different types of companies perform differently at various times, your risk is reduced.
So, you've got your 4 categories sorted; now what are they?
- ELSS Fund: This is the first fund you should buy. It's not just for tax savings, but these multi-cap funds can help you diversify your portfolio as well.
- Aggressive Hybrid Fund: Also known as Balanced Funds, they invest at least 25% in debt, allowing some exposure to another asset class.
- Multi cap Fund: These funds invest in companies of all sizes and across sectors. They've got a go-anywhere approach that helps them invest in the best ideas across the market and create a diversified portfolio.
- Large and Mid-Cap Fund: This category of fund invests in the top 200 companies in India. This means you've got a mix of current heavyweight leaders (large caps) and potential up-and-coming leaders (mid-caps).
Wrapping Up
Building a diversified investment portfolio doesn't mean you need a ton of funds. You just need to pick 3-4 categories and invest in one fund from each category. Easy peasy, right?
Investing in multiple mutual funds is essential for personal-finance and efficient management, but avoiding a messy portfolio with numerous funds is crucial. Having between 3 to 4 funds in a portfolio, chosen from different categories such as ELSS Fund, Aggressive Hybrid Fund, Multi-cap Fund, and Large and Mid-Cap Fund, provides the necessary diversification and reduces risk. Over-diversification, investing in similar funds, should be avoided as it doesn't yield extra diversification benefits.
