Mutual Funds: Should investors focus on categories rather than the number of schemes? Experts explain

Investors should ideally begin with asset allocation, not with the number of funds or even the individual fund categories.

Experts believe investors should focus on asset allocation and suitable investment categories rather than the number of funds they hold, while also being mindful of unnecessary overlap.

“Research suggests that asset allocation explains nearly 92% of the variability in portfolio returns. The first question should be: What combination of asset classes is appropriate for my financial goals, investment horizon, liquidity needs, and ability to accept volatility?

Domestic equity may provide long-term growth, fixed income may offer relative stability and income, gold and silver may provide diversification and inflation protection, while international equity can provide exposure to businesses and economic opportunities outside India,” said Saurabh Jain, Chief Business Officer, Bandhan AMC.

“Investors should think of categories in conjunction with their risk profile and investment horizon. Fund selection is the next step and investors should ideally avoid multiple funds in a single asset class or fund category,” said Jitendra Sriram, Senior Fund Manager at Baroda BNP Paribas Mutual Fund.

"A category-based approach helps us identify whether the portfolio has unnecessary duplication. But investors should remember that even funds from different categories can hold similar stocks, so category labels alone are not enough. Also, the number of funds is not the same as diversification. A single well-diversified fund can hold many securities, while several funds can have substantial overlap,” added CFP Shweta Shastri.

Ultimately, the focus should be on building a portfolio in which every fund serves a clear purpose. Choosing the right categories, maintaining suitable asset allocation and avoiding unnecessary duplication may matter far more than simply increasing the number of funds.