Investing in Too Many Mutual Funds Can Hurt Your Returns: Experts Suggest the Right Number

For many investors, diversification feels like the safest strategy. The logic is simple: spread your money across multiple mutual funds, and your risk reduces. But what happens when diversification turns into over-diversification? According to industry experts, investing in too many mutual funds can actually dilute returns, increase confusion, and make your portfolio harder to manage.

As the number of AMCs and fund categories keeps growing, new investors often end up collecting schemes without a clear plan. Before they realise it, they are holding 12-15 funds-many of them overlapping, redundant, or underperforming.

To understand why this happens, we first need to go back to the basics. Many beginners still ask what is mutual fund, how diversification works, and how many funds they actually need for their goals. Let's break this down simply and explain why "more" isn't always "better."

What is mutual fund and why people invest in too many of them

A mutual fund is an investment vehicle that pools money from multiple investors and invests it in equities, debt instruments, or a combination of both. Professional fund managers handle these investments, making it suitable for people who don't have time to pick individual stocks or bonds.

But as new investors explore mutual funds, they often fall into a common trap: they start investing in multiple schemes because:

• They want "maximum diversification"

• Online recommendations highlight top-performing schemes

• Different advisors suggest different categories

• Fear of missing out prompts multiple purchases

Over time, this leads to portfolio clutter, not better performance.

How too many mutual funds dilute your returns

Mutual funds are already diversified internally. For example, a single equity fund may hold 40-70 stocks. When you invest in many similar funds, you accidentally replicate the same stocks across schemes, reducing the impact of diversification while increasing complexity.

Here's what happens when portfolios get overcrowded:

Overlapping portfolios

You may think you own many funds, but they often hold the same top 20-30 stocks.

Difficulty tracking performance

More funds mean more statements, more NAVs to monitor, and more rebalancing stress.

Lower ability to outperform

Diversification works best up to a point. Beyond that, adding more funds reduces the potential to generate meaningful alpha.

Harder to maintain discipline

Goal tracking becomes difficult when funds are scattered across categories and AMCs.

Experts suggest that too many funds create average results rather than strong long-term outcomes.

How many mutual funds should you really hold?

The ideal number depends on your goals, income, risk appetite, and investment horizon. But financial experts across the industry generally agree:

For beginners

2-3 mutual funds are enough(e.g., one flexi-cap fund + one large-cap fund + one short-term debt fund)

For intermediate investors

4-6 mutual funds depending on goals(e.g., equity, hybrid, and debt diversification)

For advanced investors

6-8 well-chosen funds with a clear purpose for each

Going beyond 8-10 funds rarely improves returns. Instead, it increases both overlaps and confusion.

Why understanding the types of mutual funds matters

Most over-diversification happens because investors misunderstand categories. There are many types of mutual funds-equity, debt, hybrid, index, ELSS, sectoral, small-cap, liquid, and more. Each serves a different purpose.

Knowing the types of mutual funds helps you choose purpose-driven schemes instead of accumulating random ones.

For example:

• Equity funds help with long-term wealth creation

• Debt funds help with stability and short-term goals

• Hybrid funds offer a balanced approach

• Index funds provide low-cost market exposure

Once you understand this structure, choosing 4-6 relevant funds becomes much easier than picking everything that looks attractive.

Overlaps: the hidden problem most investors ignore

When two equity funds have similar stock holdings, you aren't diversifying-you're duplicating. Many investors unknowingly buy:

• Two flexi-cap funds

• Two ELSS funds

• Two multi-cap funds

• Two small-cap funds

• Three large-cap funds

All of these categories may hold the same market leaders. This overlap reduces the uniqueness of each investment and leads to an overall portfolio that behaves like a single large, average fund.

Reducing overlaps improves:

• Portfolio clarity

• Risk-adjusted returns

• Long-term consistency

How to identify whether you're over-diversified

Ask yourself the following questions:

1. Do I have more than 8 mutual funds?

If yes, chances are high that some are unnecessary.

2. Do multiple funds feel similar?

If two funds behave almost the same, you may not need both.

3. Can I clearly explain the purpose of each fund?

If not, you may be investing without a strategy.

4. Does reviewing my portfolio feel overwhelming?

Too many funds reduce clarity and discipline.

This assessment helps you trim your portfolio and focus on quality, not quantity.

What to do if you already have too many mutual funds

If you discover that you hold 10-15 schemes, don't panic. You can consolidate gradually.

Step 1: Identify overlapping funds

Choose the strongest performer and exit the weaker ones.

Step 2: Align each fund to a goal

Education, retirement, home purchase-each goal should have a clear fund.

Step 3: Reduce category repetition

Avoid owning multiple funds from the same category unless needed.

Step 4: Rebalance once or twice a year

This prevents portfolio drift and helps maintain discipline.

Gradual consolidation works better than sudden exits.

Why SIPs help maintain a cleaner portfolio

Most cluttered portfolios begin with multiple random SIPs. A structured SIP approach ensures that each investment has a clear purpose.

A SIP:

• Builds discipline

• Reduces emotional decisions

• Ensures you don't keep adding new schemes unnecessarily

• Allows long-term compounding to work effectively

Even if you hold 3-6 funds, SIPs help you stay consistent without overcrowding your investments.

Using the Bajaj Finserv Mutual Fund App to manage and optimise your portfolio

The Bajaj Finserv Mutual Fund App is designed to help investors avoid portfolio clutter and focus on clear, goal-linked investing. Inside the app, you can:

• Learn what is mutual fund in simple terms

• Explore types of mutual funds with category-wise clarity

• Track all your SIPs and investments in one place

• Identify fund overlaps more easily

• Build a goal-based portfolio instead of a scattered one

• Rebalance with simple tools and insights

For investors who want to reduce complexity and improve long-term returns, having everything in one organised platform makes a significant difference.

Final thoughts: A few strong funds beat many average ones

Investing in mutual funds should make your financial life easier-not more complicated. While diversification is essential, over-diversification often turns into a hidden drag on performance.

By understanding what is mutual fund, learning the types of mutual funds, and choosing only funds that genuinely align with your goals, you can create a cleaner, more effective portfolio.

Remember:It's better to own 5 well-chosen funds than 15 overlapping ones. Clarity leads to confidence-and confidence leads to long-term wealth creation.

*Disclaimer: The content on this page is generic and shared only for informational and explanatory purposes. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making any related decisions.

# This is a guest article authored by Bajaj Finserve Mutual Fund. For any enquiries or details, you can visit the author's website.