Well, my answer is ‘it depends’. Do not be disappointed. If you knew the factors that determine the number of funds, you need to hold, you will likely have the answer yourself. So, here’s what you need to take into account before choosing the number of funds to hold in a portfolio.
The amount
While this is not the first thing to influence your decision, it is the most practical point to consider when investing, especially by small, retail investors. If you had Rs. 1,000 or Rs. 2,000 to invest every month, you cannot possibly have an asset balanced, category allocated, and style-diversified portfolio of funds. It leaves you with an option of one or two funds at best. When you have a single-fund portfolio, it is a good idea to get this right: one, the choice (debt or equity fund) of asset class based on your period; two, if it is an equity fund, do not hold a mid/small cap, theme, or international fund as the one fund you hold. Often times, this is one reason why many first-time investors are disenchanted with mutual fund investing. They would have chosen a risky fund to begin with, and would have probably burnt their fingers in a down market. If you have a higher sum to invest – say Rs. 5,000 or above, then arises the question of asset allocation and diversification.
Asset allocation
If you need to allocate across asset classes, then you may need 2 or more funds, unless you think a balanced fund would suffice. If you are investing in a portfolio with a specific goal in mind, then ensure you have a proper asset allocation based on the goal and time frame. If you are clear that you have already allocated certain sums outside of mutual funds for certain asset classes like debt or gold (say deposits or physical gold) for the said goal, then this might be a less significant factor to consider. Otherwise, asset allocation helps capitalise the returns across various asset classes, while acting as a hedge against the other assets. Once you decide the proportion of equity, debt or gold to hold – the next requirement would be to decide how many funds to hold within each asset class.
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Diversification
Now, this is key. If you are an investor who does not think you need a portfolio diversified across market cap or different styles of investing, then holding one or two diversified equity funds, and perhaps an income fund for debt may suffice, provided you are a long-term investor. Of course, when you have a concentrated portfolio, make sure you get the funds reviewed at least annually as the risk profile of your portfolio would be high as a result of taking fewer bets.
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