How many funds would you suggest within each category for proper diversification? I have a few crores invested across large-cap, multi-cap, mid-cap, balanced, liquid and short-duration funds.
- Vijay K N
For the fixed income fund i.e. the short-duration fund, which I think is a good choice these days, make sure that the credit quality of the underlying portfolio is not very risky. With regard to the rest of the portfolio, I would say that there are different approaches to dealing with it. One approach, in addition to these debt funds, is to have two or three multi-cap funds and that is good enough.
Besides, having only two or three aggressive hybrid funds is also good enough. In fact, it eliminates the need to have any short-term fund or equity funds separately. Nevertheless, you may not get too many worthy options here.
For a more aggressive investor, the third option could be having a combination of multi-cap funds and one or two of small-cap and mid-cap funds. But I think having more than four or five funds nullifies the entire objective of investing in equity funds. This is because they will become unmanageable. Also, if you spread your portfolio more, your underlying portfolio will be more like an index fund for which, you will pay the cost of an actively managed fund. Moreover, when your portfolio becomes very fragmented, you will lose interest in the funds that don't perform well. Conversely, if some others do very well, they will not have any significant impact on your overall portfolio performance.
So, I would say not to have more than four or five funds. Those are good enough because each of those funds are actually owning 40-50 stocks. With four-five funds, your underlying portfolio could well be of above 200-250 stocks, which is good enough.