How Many Mutual Funds Should I Include In My Portfolio?

When building a mutual fund portfolio, most investors are taught the value of diversification. Spread your money across various funds, and you reduce risk; right? While that’s true, many investors go overboard and end up owning too many funds that overlap or add little value. This is known as mutual fund over-diversification, which can hurt rather than help your returns.

So, how many mutual funds should you really own? Is there a magic number? And how do you ensure your portfolio is truly diversified, not just cluttered?

This guide will walk you through the pitfalls of over-diversification, the ideal number of mutual funds to include, and best practices for creating a well-structured mutual fund portfolio.

Mutual Fund Over-Diversification

Diversification is about reducing risk by spreading your investments across different asset classes, sectors, or fund types. But when you own too many mutual funds, especially similar ones, it dilutes your portfolio’s efficiency.

Over-diversification occurs when:

• You hold multiple funds from the same category (e.g., 5 large-cap equity funds).
• The funds have similar underlying stocks or themes.
• You find it hard to track, review, or rebalance your portfolio.

Example of Over-Diversification:

Suppose you own the following equity funds:

• Fund A – Large-cap
• Fund B – Another large-cap
• Fund C – Large & mid-cap
• Fund D – Flexi-cap with large-cap tilt
• Fund E – Bluechip fund

Although they appear different, they likely have significant overlap, for example, investing in companies like Reliance, Infosys, HDFC Bank, etc. This means your portfolio is not as diversified as it looks. You’re investing in pretty much the same set of companies through multiple funds. 

Why It’s a Problem:

• Redundant holdings reduce the effectiveness of diversification.
• Portfolio management becomes more difficult.
• Returns may underperform due to overlapping strategies.
• It’s harder to evaluate performance across too many funds.
• Different funds may charge different expense ratios leading to a higher collective investment cost.

Mutual fund portfolio diversification works best when it’s thoughtful, not excessive.

What Is the Ideal Number of Mutual Funds to Own?

There’s no one-size-fits-all number, but most experts recommend holding between 7 to 10 mutual funds, depending on your goals, risk appetite, and investment experience. But, determining how many mutual funds to include in your portfolio isn’t just about picking random numbers. It requires you to understand your own financial goals, risk capacity, and time horizon. Below are the key factors to consider before deciding how many mutual funds to hold in your portfolio:

Factors That Determine the Ideal Number:

1. Investment Objective: The first and most crucial factor is your financial goal. Ask yourself: what are you investing for? Is it for a short-term goal like a vacation or home down payment? Or a long-term goal like your child’s education or retirement?
   • Short-term goals (0–3 years) typically require capital protection and liquidity. In such cases, 1–2 debt-oriented funds like liquid funds or short-duration debt funds are sufficient.
   • Medium-term goals (3–5 years) can allow a moderate mix of debt and equity. Here, you may include 1–2 hybrid funds or conservative balanced funds.
   • Long-term goals (5+ years) allow you to take on more equity exposure. You might include 3–5 equity funds across large-cap, mid-cap, and flexi-cap categories to build wealth over time.

For example, if you're saving for your child’s higher education 10 years from now, a portfolio with a flexi-cap fund, a mid-cap fund, and a short-duration debt fund gives you growth with some stability

2. Asset Allocation Strategy: Asset allocation means dividing your investment between asset classes like equity, debt, and sometimes gold or international funds. Beginners often skip this step and load up on equity mutual funds without balancing risk.
   • Equity Funds are great for wealth creation but come with volatility. These should form the core of long-term portfolios.
   • Debt Funds provide stability and steady returns, ideal for reducing overall portfolio risk.
   • Hybrid Funds combine both, ideal for conservative or first-time investors.

If you choose to include all three fund categories, then holding 1–2 mutual funds from each category (i.e., equity, debt, hybrid) can provide enough diversification without making the portfolio too complicated.

3. Risk Appetite: Risk appetite varies from person to person based on age, income, financial obligations, and past investing experience.
   • Aggressive investors in their 20s or 30s, with stable incomes and fewer liabilities, may prefer a higher allocation to equity mutual funds like small-cap or mid-cap funds. They might hold 4–5 equity-oriented mutual funds comfortably.
   • Conservative investors, such as retirees or those closer to financial goals, should prioritise capital preservation. In such cases, 1–2 hybrid or debt funds may be more suitable.

For example, a 28-year-old IT professional with no dependents might be comfortable investing in 4 mutual funds — large-cap, mid-cap, ELSS (for tax saving), and a flexi-cap fund. On the other hand, a 55-year-old with retirement approaching should limit equity exposure and stick to 1–2 conservative hybrid or short-term debt funds.

4. Investment Horizon: Your time frame for investing plays a big role in deciding how many and which types of mutual funds to own.
   • For long-term goals (5 years and beyond), equity mutual funds should dominate. Diversification across large-cap, flexi-cap, and even mid-cap funds can be considered.
   • For medium-term goals (3–5 years), hybrid funds or balanced advantage funds are preferable.
   • For short-term goals (under 3 years), sticking with 1–2 liquid or short-duration debt funds is safest.

The longer your horizon, the more room you have to diversify across fund categories. But even then, a focused 6–7 fund portfolio is typically enough.

What Is the Ideal Number of Mutual Funds to Invest In?

Now that you understand the ideal number of funds depends on your goals, allocation, risk, and horizon, let’s look at some actionable best practices to help you decide how many funds to actively invest in at any time (via SIPs or otherwise): 

1. Avoid Owning Multiple Funds from the Same Category

It’s a common beginner mistake to invest in 3–4 large-cap funds thinking it adds diversity. In reality, most of these funds invest in the same top companies. This leads to overlapping portfolios and doesn't improve your diversification.

• Stick to one quality fund per category unless you have a very large portfolio.
• Always check the portfolio overlap between funds before investing.

2. Use Core-Satellite Approach

This is a popular strategy for creating an efficient mutual fund portfolio, balances consistency and growth.

• The core portfolio (about 70–80% of your investment) consists of stable, long-term funds like large-cap or flexi-cap funds.
• The satellite portion (20–30%) includes higher-risk or thematic funds like mid-cap, sectoral, or international funds.

3. Limit Your SIPs to 3–5 Funds

If you’re investing via SIPs (Systematic Investment Plans), don’t fall into the trap of running 8–10 SIPs in different funds just for variety. Multiple SIPs often result in overlapping holdings and make it harder to monitor performance.

Always check the portfolio overlap before adding a new fund. Online tools and trading platforms can help compare fund portfolios and overlaps as they clearly mention the underlying holdings with the fund.

Additional Read: Learn How to Invest in SIP with Our Extensive Guide

4. Monitor Fund Performance Regularly

A mutual fund portfolio isn’t a “set and forget” strategy. Even with just 4–5 funds, you should:

• Check fund performance annually.
• Exit underperforming funds.
• Rebalance allocations if equity/debt exposure shifts too far from your target.

Rebalancing ensures your portfolio stays aligned with your risk tolerance and goals.

Example: SIP Investment Strategy 

Let’s say you invest ₹ 20,000 per month. A balanced allocation might look like:

• ₹ 6,000 in a flexi-cap fund
• ₹ 4,000 in a mid-cap fund
• ₹ 4,000 in a large-cap fund
• ₹ 3,000 in a short-duration debt fund
• ₹ 3,000 in an ELSS fund (If you are opting for deductions under section 80C of the Income Tax Act)

This 5-fund SIP strategy ensures mutual fund portfolio diversification without clutter.

Conclusion

When it comes to building a diversified mutual fund portfolio, quality beats quantity. It’s better to own a few well-researched, complementary funds than to scatter your money across too many with similar holdings. Over-diversification can hurt returns, complicate portfolio tracking, and confuse investment decisions.

Here’s what you should remember:

• 5 to 7 mutual funds are enough for most investors.
• Ensure each fund serves a distinct role in your portfolio.
• Avoid overlap and monitor your investments regularly.
• Rebalance as your goals or risk appetite change.

By following these best practices, you can build a lean, efficient, and goal-aligned mutual fund portfolio that grows steadily over time.