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How many funds should I have in my portfolio?

Dhirendra Kumar advises an investor currently invested in nine funds on the appropriate number for an SIP of Rs 3 lakh

For a monthly SIP of Rs 3 lakh, how many funds should one have in the portfolio? Currently, I am investing in nine funds.
- Gaurav

I think four funds can actually do the job and moving beyond four-five funds will lead to diversification that is not meaningful. If you invest Rs 3 lakh in nine funds, you are over-diversified, which is similar to investing in an index fund. Although it depends on the kinds of funds you are investing in, nine funds will make the portfolio look similar to index funds and in that case, it will be worthwhile to invest in an actual index fund and incur a very low cost.

Having three-four good-performing funds in your portfolio has two advantages. First, it ensures that your portfolio has a meaningful diversification. Second, when you are invested in a lower number of funds, you have considerable money in each of them and hence, keep track of these funds. Being invested in nine funds of which two are not performing well has little impact on you and you are not urged to take a corrective measure, since the investment in these funds will be low. However, if one or two funds out of four do not perform, you will keep a close watch on them and take actions when needed. You don't need to change mutual funds every day, but if you need to change it every two-three years, then you will change only if there is a meaningful investment in that. Hence, have fewer good-performing funds with considerable investments in each.