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title: Should I have 'x' number of funds to achieve diversification of portfolio?

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# Should I have 'x' number of funds to achieve diversification of portfolio?


## Intro
You might have heard the phrase 'Don’t put all your eggs in one basket'. But investing in too many Mutual Funds can do more harm than good. 
You should invest your money where you are comfortable and have a complete understanding of what you are investing in and keep a close track on that. 

## Why not to have too many funds

This article aims to highlight the disadvantages of investing in too many funds.

### 1. False Sense of Diversification
Having multiple funds under same category of funds does not help in diversification.
For example, there is little reason for investing 2-3 Large Cap Equity funds since there is going to be a big overlap (Overlap is when multiple funds invest in the same company). 

Let us take an example to illustrate the point by comparing UTI Nifty Index Fund with Axis Bluechip Fund which is a Large Cap funds with one of the highest AUMs. Images Below show the top 10 holdings in both these funds.

![](https://i.imgur.com/ELqgwnI.png)

Even a rough comparison shows that there is a big percentage of holdings in the same companies. To get a more accurate figure for overlap between funds, we can use tools like [thefundoo](https://www.thefundoo.com/Tools/PortfolioOverlap)
![](https://i.imgur.com/XacLRy1.png)
This shows us that there is a 64% overlap between the two funds.
SO although you might think that investing in these might diversify your investments it is not an actual diversification. 

### 2. Higher Expense Ratios
When you have multiple funds, your average expense will be higher than when you just pick one fund with a low expense ratio.

Let us say a person invests in 3 Equity Large Cap Funds:
1. SBI Blue Chip Fund – 30%
2. Axis Blue Chip Fund – 30%
3. UTI Nifty Index Fund – 40%

The average Expense ratio of this portfolio is 0.516%. If that person picks either Axis Blue Chip Fund (TER – 0.49%) or UTI Nifty Index Fund (TER – 0.18%) he/she would have to bear lower expense ratio.
This can apply to Funds across various categories as well. When you add many funds, you tend to increase the overall average expense ratio.

### 3. Psychological Aspect

The key to building a portfolio is investing consistently. If you have many funds in your portfolio then you might observe that some of them outperform the others and might get tempted to invest only in them and/or redeem from the other funds. We all tend to forget that 'past returns do not indicate future performance' and will try to 'time the market' which mostly results in losses.
Therefore, investing in a limited number of funds will help you be more consistent in the long run.

### 4. Difficult to track
If one is having a portfolio of 30-40, tracking the transactions will be a huge challenge and tax liability also will come if you switch.

### 5. AMC Risk

Many people are afraid of putting all their money with a single AMC considering the risk of closure of that fund house. But nothing to fret since something like this does not happen overnight and if you are keeping a close watch (see point 4), then you will realize the probability of this risk realizing. There are systems also in place by SEBI also to safeguard investor's money.







