Published: 22nd Aug 2024
By: Value Research
When it comes to investing, it’s crucial to diversify. And if you are a mutual fund investor, investing merely in one or two funds isn’t enough. You need to spread your money across multiple funds.
Diversifying your investments across different funds helps shield you from the poor performance of any single fund. If a particular fund is not meeting its benchmark or performing worse than similar funds, it will not have a significant impact on your overall returns. This is because only a portion of your investment is allocated to that specific fund.
Diversification does not imply investing in too many funds. Often, investors assume that they need to buy lots of funds to diversify their portfolios. Yet, after a certain point, diversification doesn’t provide additional benefits.
If you invest in too many funds, there’s a high possibility of a portfolio overlap. Simply put, if you have invested in multiple funds from the same category, they may hold similar stocks. In short, you may just be adding stocks you already own.
Another drawback of investing in a large number of funds is that it becomes challenging to monitor each fund’s performance.
To know how many mutual funds you should ideally buy, read the complete story by heading to the link below.