How many mutual funds must I invest in?

Here is a list of the equity funds I have invested in.

i. Franklin India Blue Chip

ii. Franklin India Flexicap

iii. HDFC Equity

iv. HDFC Capital Builder

v. HSBC Equity

vi. Fidelity Equity

vii. SBI Magnum Global

viii. ABN AMRO Equity

Have I invested in too many funds? Does it make sense to exit some of these funds and concentrate on a few? I would also like some advice on an ideal portfolio.

- Sid

Is it better to invest in two or three funds or more?

- Priya K

First, let us talk about the number of funds.

Sometimes, investors are under the assumption that the more funds they have, the greater the diversification and the better the portfolio.

There's no set rule as to how many funds one should invest in. It is a very personal decision and depends on the amount you are investing and the type of funds you want to invest in.

Sid has invested in eight and that seems fine. Broadly, we feel it should be below 12.

Over to Sid's portfolio. 

SIP is good

It's good to see you are investing in mutual funds via a SIP.

Not only does it make you more disciplined, it also prevents you from trying to time the market, in which case you could make some huge investment errors.

For those who want to know more about SIPs, read How to invest in a mutual fund

Diversification

You have chosen good funds for your portfolio, though you could have avoided some of the new funds you recently invested in.

Your current portfolio looks good in terms of diversification. Since we have no idea how much you have invested in each fund, we will assume an equal allocation to each.

Going by that, about 55% of your investment is in large caps, 35% in mid caps and the remaining in small caps.

Market capitalisation is nothing but the number of shares of the company multiplied by the market price of the share. Based on this, stocks are classified as large, mid and small cap. Funds that invest in such shares are accordingly categorised.

Read Why mid caps are hot to understand more about this.

Your portfolio also looks quite diversified across stocks and sectors.

Picking the winners

It would not make sense to exit some of the funds right now, since many of your investments are less than a year old. If you sell your units now, you will end up paying capital gains and an exit load.

An exit load is a fee imposed when you sell the units of a fund. If you pay an entry load (fee when you buy the units of a fund), you may not be charged an exit load. However, if you sell the units within a year, an exit load may be levied.

When you sell any asset you own (house, land, shares, mutual fund units, gold, debentures, bonds) and you make a profit on the sale, it is known as capital gain. The tax you pay on this profit is called the capital gains tax. All you want to know about capital gain will explain this in detail.

So, instead of selling any units now, make sure your future investments are in a fewer funds. Concentrate on a few funds in your portfolio for your future investments and keep investing in them through the SIP mode.

To compare the funds in your portfolio, look at the returns. How to compare mutual funds should give you a good idea as to how you can do that.

Also, check out how risky each fund is. How risky is your mutual fund will enable you to do that.

The ideal portfolio

There is no such thing as an ideal portfolio. It differs from individual to individual. A portfolio that is well suited to you may be totally inappropriate for someone else.

Factors like tenure of investment, how much of risk an individual is willing to take, in which other avenues he has invested in are some factors that go into determining a portfolio.

If you are investing for the long term, say five to seven years or more, then investing in equity funds is apt. In this case, you can ride the highs and lows of the stock market because you will have no urgent need of money and, hence, no need to sell.

For the medium-term, look at balanced funds (funds that invest in equity and fixed return investments). This gives a fair return as well as provide you with some stability.

For short term investments of, say, six months, there are short-term debt funds which are the most appropriate, since equities can turn out to be risky over such a short duration. Tired of your savings account? Try this will tell you about such funds.

Take a hard look at these factors and decide how much you would like to invest in different asset classes. Once you have decided the equity-debt mix of your portfolio, then select the funds to achieve it.

While selecting the funds, keep in mind the allocation to large and mid caps, and diversification across stocks and sectors.

Avoid funds that have similar looking portfolios as it will only lead to duplication. You can see a fund's portfolio on its website.

Once you have zeroed down upon the funds that fit your portfolio, then invest in them regularly through the SIP mode.

Finally, decide whether you are comfortable with an all-equity portfolio. If not, then consider a good balanced fund like HDFC Prudence to introduce the debt component.