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Are two-three funds sufficient for diversification while investing a huge sum?

Dhirendra Kumar advises on adequate number of funds to achieve diversification while investing a large amount


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Does the advice to hold only four to five funds in a portfolio holds true even when the monthly surplus to be invested is comparatively large, say Rs 55,000-60,000?
- Viresh

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Yes, absolutely. Even for investors who have much larger surplus, investing in two or three funds could well get them great diversification. The problem with investing in five-six funds is that of duplication. For many funds the underlying portfolio will be the same and might even have a long tail. So it will not have a meaningful impact. If you have more than ten funds then I'm confident that most portfolios will turn out to be a quasi-index fund. Incurring the cost of actively managed fund and having a portfolio of index funds is not a good idea. Nowadays many people are talking about index funds and they have definitely made a mark by beating large-cap funds. However, I do not see that to be a norm in coming times.

To summarise, you shouldn't have more than three-four funds in your portfolio even if you have large sums of money. However if you have something like Rs 5000 crore, in that case you definitely need to put in some extra checks and balances like not investing more than 25 per cent in a single fund, etcetera.

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