How many mutual funds should you own in your portfolio?
The ideal number depends on your investment goal and diversification needs. A portfolio with 30 funds can be poorly diversified too, while another portfolio with just a few funds can provide you with diversification that you might need. That’s why you need to know how much unique exposure each fund actually adds to your portfolio instead of simply adding another fund. There is no “one size fits all” number that can be universally recommended for every investor. The right number depends on how many funds you can understand and monitor without creating unwanted overlap in your portfolio.
A lot of investors ask this question when they realize that the number of funds in their portfolio has grown to an unusually high number.
That’s why we decided to document this case study, which specifically deals with this issue.
A lot of mutual funds. A lot of categories. And one investor who eventually came to us with “Can you fix this portfolio?”
He didn’t mean that the investments themselves were necessarily good or bad.
The problem was the complexity of his portfolio, which made it increasingly difficult for him to monitor his investments. He couldn’t clearly answer why he owned those specific funds, where his diversification was coming from, or whether he was buying a genuinely different investment or simply repeating the same underlying exposure through different funds.
This is a real portfolio restructuring case we worked on at Steadrow Capitals.
The investor from Yol, Dharamshala, is a long-term client of ours and had his core portfolio with us. Before working with Steadrow Capitals, he had also been investing through other mutual fund platforms. Which is not a rare case these days.
Although the majority of his investments were with us, he continued to maintain that separate portfolio for experimentation. Again, as we have noticed with many other investors as well, this is also not rare.
Eventually, that experimental portfolio had gathered nearly 30 mutual funds for all kind of reasons.
And he wanted us to take a look at it. In his words, “Fix it”.
Since this is a frequent situation, we decided to document this case. This investor’s situation will not be the same as every other investor’s, but the lessons from this case can be useful to anyone facing a similar situation.
“30 Mutual Funds in a portfolio” is not a problem in itself
There is no fixed rule that says an investor should never own 30 mutual funds.
The number of funds alone doesn’t tell you if the portfolio is good or bad in terms of investment.
But
What is the exposure of each fund in my overall portfolio, and what role or purpose does that fund serve the portfolio?
Once we started diving deep into his portfolio, we found out that the investor had collected different funds at points with many different reasons.
And as usual, on the surface it looks like a really nice diversified portfolio because it covers multiple categories from the investment world.
That got us to our first step in the restructuring.
Step 1: Segregation of the Funds by Category
For anyone trying to restructure a mutual fund portfolio, the first thing to do is to stop looking at it like a list of individual funds and instead divide them into categories. That’s what we did.
This gave us a much clearer picture.
The client came with 30 funds and they were distributed as follows:
Mutual Fund Category | Number of Funds |
Large Cap | 12 |
Mid Cap | 6 |
Flexi Cap | 4 |
Thematic | 4 |
Small Cap | 4 |
Total | 30 |
This categorization already revealed some important points.
The problem was concentration within categories. A seasoned investor might laugh at this situation and ask why would you even need so many large cap funds in one portfolio?
Large cap is not that big of a category to have so many funds in it. But while dealing with investors from Dharamshala, Kangra and Palampur, we have noticed that this situation is not that rare.
For anyone trying to do this on their own: You can easily identify the category of your fund on whatever platform you are trying to use to invest. Or else a simple Google search can easily help you with this. Simply search each fund to identify the respective category and write them all down.
So twelve large-cap funds immediately raised a question:
One might ask how different can one large cap be from another?
Step 2: Overlap Check Between Funds
Categorizing the portfolio was just the diagnosis that we need to do as first step, But it is only useful if we go ahead with the process of treatment of what we found in the diagnosis.
Going further deep down the portfolio trench, we checked the individual holdings in each category.
How we measured the overlap: We used publicly available mutual fund overlap calculators to compare the underlying holdings of the funds in the portfolio. These tools are freely available to investors online. The percentages mentioned below represent the overlap ranges observed during our review of this particular portfolio.
This is where things became interesting.
Large Cap Funds: 50-60% Overlap
The investor had 12 large-cap funds. So this was expected to us since this category is not wide enough.
When we compared all the holdings in this category, we found approximately 50-60% overlap among the large-cap funds.
So what could seem like 12 times the diversification simply meant that most of the time he was just buying different funds but with substantial exposure to many of the same underlying companies.
A lot of the exposure was being repeated. The reason for this is not just the high number of funds he was owning. It is also because the pool of companies available for large cap funds to invest in is very small. Just 100 companies. That is a very small category in terms of the number of companies to have 12 mutual funds in.
Mid Cap Funds: 35-45% Overlap
In the next category, the six mid-cap funds had approximately half of their holdings overlapping.
Many of the mutual funds were providing exposure to many of the same underlying companies. It might be easy to skip, but mutual funds are ultimately buying companies in them and those assets could many times overlap and your two different funds could be buying the same underlying assets/companies.
Flexi Cap Funds: Around 30% Overlap
The four flexi-cap funds had approximately 30% overlap within the category.
That was lower than the large-cap and mid-cap funds, but it was still a lot.
The reason for that could be: the universe for flexi-cap funds is much larger than that of large-cap funds. A large cap fund must invest 80% of its assets in large cap companies. That means only 100 companies to choose from and visibly higher chance of overlap.
While for Flexi cap, as per Securities and Exchange Board of India (SEBI), these funds must invest at least 65% of their total assets in equities and equity-related instruments but with no fixed allocation in large, mid and small cap. That gives them a much bigger pool to choose from and hence lower chances of overlap as compared to large cap. Still, 30% overlap is not something to ignore.
Small Cap Funds: 20-30% Overlap
So even in this category which has the highest number of companies to invest in, owning four different schemes didn’t mean four completely different portfolios. 20-30% of the portfolio was just being repeated with a different name.
This is a very important diagnosis that every investor must do. You don’t need to do it manually by checking holdings of each mutual fund you own. Many online platforms currently do that for you. A simple search will land you to a free tool that can do it for you. Anyone can check the overlap between multiple funds they own on these platforms. Write these overlap numbers down, but don’t stop there yet. You will have to check the overlap again.
Another Problem: Overlap Across Different Categories
Checking the overlap within the category is a fine start because it has more chance of overlapping. But it is not the place to stop.
Mutual funds can also have overlap across the categories. Although large cap, midcap and small cap funds need to invest mostly inside their own category, some funds can invest across the market caps. One example of this is Flexi cap funds which the client had in his portfolio.
So the overlap can naturally be in
Large Cap to Large Cap, Mid Cap to Mid Cap
But it could also be in:
Flexi Cap – Large Cap
Flexi Cap – Mid Cap
Flexi Cap – Small Cap
This is an important thing to notice for all investors. A different category doesn’t mean totally different holdings inside those mutual funds. SEBI has clear distinctions when it comes to the categories of mutual funds, it is always helpful to go through them to understand how different categories can overlap despite being different.
Simply put, you can own funds from different categories and still have overlap in the companies you ultimately own.
Different fund names, different AMCs, even the categories could be different. But under the surface, you can still end up owning the same holdings multiple times.
Making the Portfolio Make Sense
So the segregation was done, analysis of the underlying holdings was done, and at this point the problem became much easier to understand and explain to the client as well.
Oftentimes we have seen at Steadrow Capitals with investors in Dharamshala that many want to understand and learn, but the complication of the investment world seems overwhelming at times.
As expected with such a large number of funds, the investor was buying the same holdings with different packaging.
This surprised the investor.
Obviously, he had not intentionally decided:
“oh I want to buy the same companies repeatedly, that will get me good returns”
That’s not how it happens, nobody thinks like that. It happens slowly and gradually. Without the intentions. Each fund was added at some point with some sense and then another at a different time with a different sense.
Then some came for the purpose of diversification. Some came for the purpose of experimentation.
Each individual decision could appear right if you look at it in isolation only.
But when you mix all those isolated decisions into a combined portfolio, then the outcome becomes very very complicated as we were seeing in this client’s portfolio.
Without periodically reviewing your portfolio in a zoomed out view, many reasonable decisions can combine to become one big bad decision.
Once we showed him the category-wise allocation and the overlap, he understood what was happening. He didn’t need a lot of hand holding, just the clearing up of the noise. And then he saw clearly.
Then came what we call at Steadrow capitals: “Cleaning up the mess”
Step 3: Removing Unnecessary Duplication
The first step in this was to simply ask:
Does this fund even add something meaningfully unique to the portfolio? Something that the existing funds aren’t already providing?
This process started with focusing on the duplication within each category.
Large-cap had the biggest problem. Not only because of the high number (12) of funds in this one category. That was bad enough. But large cap in itself is the category with the highest average overlap. Reason is the limited number of stocks to choose from.
We went to categories. One by one. Fixing each category
We reduced those 12 large-cap funds to 2.
The small-cap allocation was reduced from 4 funds to 2.
4 flexi-cap funds were reduced to 1.
4 mid-cap funds were reduced to 1.
4 thematic funds were reduced to 1, keeping the thematic exposure limited but intentional.
The whole approach was to remove unnecessary repetition.
Step 4: Rebalancing the Portfolio
Reducing schemes does not mean we are creating a well-diversified portfolio. We looked beyond this and found another issue.
It is not always the same thing to have fewer funds and good diversification.
As you can notice, the whole portfolio is still tilted massively towards equity. This keeps the risk high even if there is enough diversification and less overlap.
In this case though, this was consistent with the investor’s intended investment risk.
However, there was still no debt allocation in the portfolio.
Going beyond categories, we need to ask the asset allocation question. “How many assets are represented in the portfolio?”
We had to add one debt fund.
So the restructuring was doing what we believe a proper portfolio restructuring should do: Reducing over diversification within over represented categories while improving diversification across asset classes.
This is a much different approach from what investors generally take when they find themselves stuck in a portfolio with so many funds.
Blindly decreasing 30 funds to a few is an easy thing to do. But not the right thing.
For anyone trying to restructure their portfolio: simply ask “which category and asset class are over represented and which category is under represented?”
The Portfolio After the Fix
The final structure was considerably simpler.
Category | Before | After |
Large Cap | 12 | 2 |
Mid Cap | 6 | 1 |
Flexi Cap | 4 | 1 |
Thematic | 4 | 1 |
Small Cap | 4 | 2 |
Debt | 0 | 1 |
Total | 30 | 8 |
So now the portfolio has gone down from 30 to 8 mutual funds.
This number 8 isn’t any magic number. Perhaps for some other portfolio or investor that number is 5 or 10 or something else.
This is just a consequence of analysis. Not the aim of it.
Starting with a final number is not a good way to do this. That can cause you to make wrong decisions just to get close to that number.
Remember the initial question we asked with each fund: “What meaningfully unique value does it provide to the portfolio that can’t be achieved from other funds?”
For the sake of simplification, the steps look a little like this:
Category – Holdings – Overlap – Role – Allocation – Diversification
If an investor goes through this, then the resulting number will be his magic number for how many funds he should have.
What Changed for the Investor?
We needed to know what actual value this whole process brought to the investor in actuality. So after 3 months, we tried to extract from the investor the impact of the restructuring process. And we are not talking about the returns only. 3 months is a very small time frame to see results of long-term investing. But we wanted to see the impact of this whole process beyond the numbers.
His feedback was particularly interesting.
1. He Felt Better About the Diversification
It was ironic but now that the portfolio had fewer funds, he felt that diversification was actually better now.
Certainly because now he was aware of the source of diversification in his portfolio, instead of just filling up funds and hoping that he will be protected with diversification.
After restructuring, diversification was clear and visible at the portfolio level. And any investor who has been in the markets for a while knows that it is a source of confidence.
2. Tracking Became Much Much Easier
Managing just a few mutual funds is a task in itself. Especially since we are emotionally attached to our investments. So managing 30 will obviously be a mammoth task. Physically and emotionally both. Imagine the load of reports, statements, fund names, performance numbers one has to keep track of.
After the restructuring, the investor found that the portfolio is much easier to monitor and track.
And since there was a clear role for each fund, he knew how well a fund is doing at a given time.
3. Noticeable reduction in Expense Ratio
Investor also noticed that the overall expense burden of the portfolio is much lower now.
Although this wasn’t our objective in this restructuring, it is still a nice consequence.
The main aim was to remove unnecessary duplication and when we do that simplification to a portfolio.
Although reducing the number of funds does not automatically reduce expense ratio, the restructuring also resulted in a lower overall expense ratio for this particular portfolio.
4. A Noticeable Decrease in Portfolio Headache
This was perhaps the most important of all. The portfolio stopped feeling like a boulder on the shoulder. This same portfolio was a source of frustration for this investor but now it became much easier and more pleasant to manage as well.
Investors should know that investing is not supposed to be such a headache all the time. A frustrating portfolio can make it harder to stay invested for the long term, which can itself become a problem.
That’s why we consider it a very important behavioral consequence.
As we have noticed while dealing with investors from all over the country, when investors understand what they own and why they own it, it becomes easier to stay committed to the portfolio for the long term.
Uncertainty can lead to unnecessary changes.
And unnecessary changes can become a bigger problem than the original portfolio structure.
What Can Other Investors Learn from This Case?
This isn’t a fairy tale story of decreasing 30 mutual funds to 8. It is actually a story about understanding your investments beyond the profit and loss numbers.
Below are the practical lessons we believe any investor can take away from this case:
1. Don't Count the Number of Funds. Analyse the Exposure.
As mentioned many times in this article, owning 15 funds does not mean you are more diversified. And similarly a portfolio with 7 funds doesn’t mean it has any less diversification.
You need to look beyond the fund names.
On the surface level you need to ask:
• Which companies do these funds own?
• How much overlap exists between these funds?
• Are multiple funds serving the same purpose?
• Are different categories actually giving me different exposures or still overlapping?
2. Categorise Your Portfolio First
This will be the biggest step in having visual clarity about your portfolio. Instead of wasting time researching another shiny fund, start with a simple sheet and put every fund into a category. You can easily find the fund category on the internet.
The fund house’s own website is handy in this too.
Put every fund into categories such as:
• Large Cap
• Mid Cap
• Small Cap
• Flexi Cap
• Thematic/Sectoral
• Hybrid
• Debt
• Other relevant categories
The moment you group the funds, patterns that were invisible in a long list often become obvious. You suddenly realize that you have overloaded to one side too much.
In this case, 12 large-cap funds sitting next to each other immediately changed how we looked at the portfolio. And it gave a sudden clarity to the investor as well.
3. Check Overlap Within Categories
After having visual clarity, it is time to act on it.
Start by comparing the holdings in each fund of the same category. To save time, you can simply use online tools by searching “mutual fund overlap calculator”. Plenty provide this for free, so make use of it.
A simple example:
Suppose you own three large-cap funds.
If all three have heavy exposure to many of the same companies, then adding the third fund may not provide as much diversification as you assume.
The fund names are different. But they do not provide any different exposure.
4. Check Overlap Across Categories Too
Categorization is important for the visual clarity, but eventually you need to step beyond it.
A flexi-cap fund can invest across large-, mid- and small-cap companies. You can check the SEBI website for categorization information. All the mutual funds have to follow strict rules regarding categorization.
Therefore, checking only “large-cap versus large-cap” is not enough. It is a good start but not enough.
You should also understand how your flexi-cap or multi-cap exposure overlaps with your other equity funds. Remember, these are the funds which can invest through different caps or asset classes.
Diversification has to be viewed at the portfolio level, not just the scheme or category level. Going step by step helps in it.
5. Every Fund Should Have a Reason to Exist
Confront each fund and simply ask,
“What job is this fund exactly doing?”
The answer could be:
• large-cap exposure
• mid-cap exposure
• small-cap exposure
• debt allocation
• a specific investment objective
• thematic exposure
• another clearly defined role
And with these exposures they can either target growth for your portfolio or stability or something in between. But they must have a purpose.
But buying because someone recommended it or some YouTube video said so, is not a portfolio strategy. You have to understand the role of the fund on the fundamental level.
6. Just Removing Funds Will Not Automatically Make the Portfolio Clean
Ironically, this case study also teaches the opposite lesson. Simplification of a portfolio is not just random selling.
You can’t exit the funds just because you have more in number. That might bring the number of funds down but will not achieve anything.
The decision to keep or remove the fund should come from analyzing the complete portfolio as a whole, not from a simplistic rule of owning only “10” funds. There is no magic number that can work for everyone. Investing rarely has those one size fits all rules.
If you follow the above steps, you will be able to pinpoint which parts of your portfolio are unnecessarily concentrated and which areas need actual diversification. Follow that and only keep funds that justify their roles in those sections. You don’t need any more diversification than that.
When Should You Review Your Mutual Fund Portfolio?
At Steadrow Capitals, we review each portfolio once a month. Or whenever there are significant changes in the market.
But that doesn’t mean we make changes to the portfolios every time we review it.
It’s well established that excessive tinkering can be harmful.
Below are the points that make a portfolio review useful:
• you have accumulated a large number of funds;
• you don’t remember why you own some of them;
• you have multiple funds in the same category;
• you suspect significant overlap;
• your financial goals have changed;
• your asset allocation has drifted;
• you have investments spread across multiple platforms;
• or tracking the portfolio has itself become difficult.
Review doesn’t mean there is going to be a transaction as well. The main purpose is to have a proper understanding of your portfolio. And if that understanding is missing, then you know that you need to change something.
From 30 Funds to 8: The win here is the simplification, not the Number
Whenever someone is suffering from over accumulation of funds, then the obvious meaning of fixing is to just blindly reduce the number of funds in the portfolio.
But the real problem in this case was not exactly the number but the lack of portfolio-level clarity. And this lack of clarity can make you get more funds with no purpose at all.
We found overlap after overlap. Within categories, across categories and absence of debt part which was needed in this particular portfolio. All contributing to a structure that had become difficult to manage or monitor for any normal investor.
Blindly deleting funds was never a solution. With that, we might have ended up deleting the funds which are not overlapping while keeping the funds which are severely overlapping.
The solution was to:
Classify – Analyse – Compare – Remove unnecessary duplication – Rebalance – Diversify across relevant asset classes – Simplify
It is actually this simple. But simple doesn’t mean it is easy.
This resulted in a portfolio that was now much easier to understand, monitor and stay invested in with greater confidence.
That’s why when we asked for the investor’s feedback after three months, it wasn’t a return percentage.
It was the lack of headache. Portfolio headache.
It might sound like an unnecessary part in terms of investing because we are so consumed by the numbers such as percentage returns, CAGR, XIRR, Beta etc. But for many investors this lack of portfolio headache is much more important.
When your investments no longer feel like a headache, it can become easier to stay invested in them for the long term.
A portfolio should be constructed in a way that the investor can understand it, monitor it and stay committed to it for a long time. And it is so much difficult to stay invested in a portfolio that is a source of headache for you.
About Steadrow Capitals
Portfolio management starts with an understanding of the existing financial picture of the investor, not by simply adding one more mutual fund.
At Steadrow Capitals, we firmly believe that our investors should understand the investments so well that it can never become a source of headache for them.
As an AMFI-Registered mutual fund distributor, we help investors in structuring their mutual fund investments with a clear understanding of their goals, risk and asset allocation.
This case is an example of that process in practice. We document such case studies regularly to go beyond our clients and help other investors who are in a similar situation as well.
FAQs About Number of Funds in Portfolio
Is having 30 mutual funds in a portfolio bad?
Not necessarily. The number of mutual funds alone does not determine whether a portfolio is good or bad. What matters is the exposure each fund provides, the overlap between funds, the role each fund serves and whether the portfolio is properly diversified across relevant categories and asset classes.
What is mutual fund overlap?
Mutual fund overlap happens when two or more mutual funds hold many of the same underlying companies. Funds from the same category can overlap, and overlap can also exist across different categories.
How can I check the overlap between my mutual funds?
You can use publicly available mutual fund overlap calculators to compare the underlying holdings of the funds in your portfolio. Many online platforms provide these tools for free. They can help you identify how much your funds are repeating the same underlying exposure.
Can mutual funds from different categories have overlapping holdings?
Yes. Different mutual fund categories can still have overlapping holdings. For example, a flexi-cap fund can invest across large-cap, mid-cap and small-cap companies. Therefore, a portfolio can have overlap not only between funds in the same category but also across different categories.
Does having more mutual funds mean better diversification?
No. Adding more mutual funds does not automatically create better diversification. If several funds have substantial exposure to the same underlying companies, the additional funds may simply repeat exposure that already exists in the portfolio.
How do you reduce over-diversification in a mutual fund portfolio?
The first step is to categorise the funds and understand where the portfolio is concentrated. Then, the underlying holdings can be compared to identify overlap. Funds that do not provide meaningfully unique exposure can then be evaluated for removal, while the overall asset allocation and diversification of the portfolio should also be considered.
What should I check before removing mutual funds from my portfolio?
You should not remove funds simply because you have too many of them. First consider the category of each fund, its underlying holdings, the overlap with other funds, the role it serves and the overall allocation of the portfolio. The objective should be to remove unnecessary duplication rather than simply reach a specific number of funds.
How does Steadrow Capitals prevent unnecessary overlap in investors' mutual fund portfolios?
Generally, Steadrow Capitals focuses on understanding the investments at the portfolio level rather than simply adding another mutual fund. They categorise the funds, analyse their underlying holdings and check for overlap within and across categories. They also look at the role each fund serves, the overall asset allocation and whether a new fund is actually adding unique exposure or just using up space. This helps prevent Steadrow investors from gradually accumulating multiple funds that provide similar exposure under different names.
This article is based on a real portfolio restructuring experience, with certain personal details omitted or presented only for educational context. The portfolio structure, fund selection and restructuring decisions described here were specific to that investor’s circumstances and should not be treated as a recommendation for other investors.
Mutual fund investments are subject to market risks. Past performance is not indicative of future results. Investors should evaluate their own financial goals, risk profile, investment horizon and existing portfolio before making investment decisions. The overlap percentages mentioned in this case represent the analysis conducted for this particular portfolio and should not be interpreted as a universal measure of diversification or portfolio quality. The case study is presented for educational purposes. The portfolio decisions described were based on this investor’s individual circumstances and should not be interpreted as a recommendation for other investors.
Holding the NISM Series V-A certification, Himanshu is a Partner at Steadrow Capitals. Backed by over ten years of equity market experience, he helps investors make informed financial decisions utilizing strictly goal-oriented strategies.