Too many mutual funds? The real sign of a cluttered portfolio isn't the number

A portfolio rarely becomes cluttered overnight. It happens one investment at a time, a mutual fund bought because a friend recommended it, another because everyone seemed to be buying it, a few more added in the name of diversification, and perhaps an old investment that was never reviewed.

“Multiple funds within the same asset class, fund sub-category is usually one of the indications of a cluttered portfolio of MF schemes,” said Jitendra Sriram, Senior Fund Manager at Baroda BNP Paribas Mutual Fund.

Too much diversification can also dilute the impact of individual holdings on overall returns.

“Over-diversification in many instances may reduce the volatility in a portfolio. On the flip side, it may have an impact on the returns as well. Portfolio sizing is an important element of portfolio construction, and the size of a holding determines its impact on the returns. Too many holdings would dilute the impact of performance of any particular holding – may protect the downside but investors would lose on the potential upside,” Sriram said.

But there is no magic number that automatically makes a portfolio too crowded.

“If you're holding like 8-10 funds in a ₹1 crore portfolio, it is okay. But if you are holding 20-25 funds in a ₹50 lakh portfolio, it's worth a second look. Usually it means the portfolio grew without a plan and funds got added because they looked good at the time, not because they filled a real gap,” said Shweta Shastri, CFP and founder at Finnora Wealth Studio.

She points to common examples of overlap: holding a large-cap and a flexi-cap fund from the same AMC when they follow similar stock-picking strategies, holding a large-cap fund alongside a large and mid-cap fund from the same AMC, or simply accumulating two or three flexi-cap funds.

And the number of funds is only one part of the problem. Correlation matters more.

“Say you hold twelve equity funds. If ten or eleven of them rise together in a rally, and fall together in a correction, you're not diversified but you're just holding the same bet under different names,” Shastri said.

So, instead of constantly adding the next best-performing scheme, investors should look at overlap and correlation. The simplest test is also the most useful: for every fund you own, ask why am I holding this fund?

If two or three investments have essentially the same answer, it may be time to declutter.