How Many Funds to own

Mutual funds have clearly emerged as the principal savings vehicle. I am frequently presented a portfolio, which looks like an art collection. If you have been a serious fund investor saving at every opportunity, its time to administer an inventory check to your portfolio. How many do you have? With collecting funds being much easier than reorganising your portfolio, you might have--over the years--ended up being more of a collector than a real investor.

How many are many? Or to put it straight, how many Mutual funds should you have in your portfolio? You now have a battery of mutual flooding the market, there are over 300 open and closed-end funds in existence.

You might argue that one can never get enough diversification, and that, one should diversify not just in one asset class, or within that asset class, but in one's fund managers too.

But owning 20 funds might not just be 20 times better than owning a single one. Over extended periods of time, many funds are likely to perform so similarly that they are more likely to overlap than complement one another. And you might end up as the guy who wears trousers with an elastic waistband plus a belt and suspenders.

This is more true of the Indian markets, where there is a lack of depth in both the equity and the debt segments. A cursory look at the top holdings of most of the Unit Trust of India's equity scheme reveals that there is more overlap than diversification if you invest in more than one of its schemes.

In fact, the bull run of 1993-94 and the recent market behaviour – markets driven by few sectors and stocks shows that when one fund goes way up, they all go way up and when one goes down, they all go way down. Very few funds can consistently give returns in good times and bad. The tracking job involved in itself is enough for you to avoid the scattershot investing strategy. So, then, how many mutual funds should you have in your investment portfolio?

In order to be well diversified, your mutual fund portfolio should be invested in equity funds and/or debt funds.

For the investor who's just starting out and wants something reasonably conservative, or for someone who can afford only one fund, a balanced fund with an exposure in fifty different stocks and bonds should achieve enough diversification.

For the equity funds, for investors with more financial leverage, the ideal number of fund would depend on their investment goals, risk profile and the time horizon. For most investors, ideally an evenly diversified fund without any strong sector focus and with track record of consistent performance should form your core portfolio. Consider exotic technology funds and aggressive equity fund as supplementary investment. This should suffice for most investors with sufficient earning life. This takes the number of funds to two or three. You should also consider adding an open-end tax saving fund and look beyond (Section 88) tax concession and three-year lock-in and consider it as regular retirement savings. Disciplined saving over years till your retirement has the potential to give the most pleasing results.

For your income requirement, one or at most two bond funds in your portfolio may make sense, but it is difficult to imagine the value of more than two bond funds of the recent genre i.e. open-end income funds. The recommended count ignores the guaranteed return funds of Unit Trust and LIC which are more comparable with a bank's fixed deposit, though structured as a fund.

Thus ideally your portfolio should not have more than four-five funds. Of course, that is not counting the closed-end tax saving funds you would invested over years. Taking the time to create an efficient and organised fund portfolio may prove to be your key investment.