Too many mutual funds in your portfolio? Overdiversification could be hurting returns
A well-structured mutual fund portfolio can be a powerful wealth-creation tool, but adding too many schemes can sometimes work against long-term goals. This is a common problem for investors who save regularly, are comfortable taking risk, and want to diversify, but end up putting small amounts of money into too many places, which reduces the impact of their investments.
Raj Yadav is an investor and a viewer of The Money Show on ET Now. He is investing with SIPs of Rs 5,000 each across several equity, gold, and multi-asset schemes, taking his total monthly SIP to around Rs 45,000. Alongside this, he has also made lumpsum investments of about Rs 5 lakh each in select equity-oriented and hybrid funds. With an additional Rs 30 lakh planned for investment and ability to take risk, his financial goal is: building a Rs 4 crore corpus over the next 10 years.
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His SIP portfolio includes Parag Parikh Flexicap, ICICI Largecap, Motilal Oswal Large and Mid, Franklin India Opportunities, SBI gold, ICICI Multi Asset, Kotak Midcap, Bandhan Smallcap whereas the lumpsum portfolio includes ICICI Large, HDFC Balanced Advantage, Parag Parikh Flexicap ICICI Multi Asset.
The expert, Nikhil Kothari, Director, Etica Wealth, reviewed the portfolio and said that he has done a long-term SIP, his goals are long-term, and he is continuing SIPs for a reasonable amount of time, which Kothari regarded he did well.
The expert points out that the biggest risk in this portfolio is overdiversification. Most equity mutual funds already hold 40-50 stocks. When an investor owns 8-10 such funds, the combined portfolio effectively mirrors a large part of the market, according to Kothari.
In such cases, strong performance from some funds is often offset by weaker performance from others, resulting in returns that are broadly in line with the index, despite higher complexity and effort.
The recommendation is to limit the portfolio to four or five core funds across distinct categories. “So, in that case you are better off buying only one index fund instead of buying so many funds in the portfolio. So, I will say that you should not have more than four-five funds in a portfolio and that too from different categories, so that is the ideal strategy what one should have,” Kothari said.
A balanced structure could include one large cap fund, one flexi-cap fund, one midcap fund, and one smallcap fund. For the flexicap category, the expert recommended Parag Parikh Flexi Cap Fund and for the large cap, Kothari recommended ICICI Prudential Largecap Fund.
If the investor wants value as a strategy, then Motilal Oswal BSE Enhanced Value Index is also good. Since the investor already has exposure to gold and a multi-asset funds, SBI and ICICI Multi Asset Fund which he can also continue in the current context.
Kothari said that, “So, these are the good funds which he can have in the portfolio and incrementally whatever money he invests, he should invest in the same funds. He should not add any more funds in the portfolio because it will lead to extreme overdiversification and then what will happen is that few funds will outperform, few funds will underperform, and overall, his return is in line with the index.”
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Another important aspect highlighted is the investment goal of achieving Rs 4 crore in 10 years. Targeting Rs 4 crore in just 10 years is considered aggressive, as compounding typically becomes more powerful over longer periods. Experts suggest extending the time horizon to 15–20 years, which would significantly improve the probability of achieving—or even exceeding—the desired corpus, assuming disciplined SIPs and reasonable market returns.
As for deploying the additional Rs 30 lakh, a staggered approach is advised. Rather than investing the entire amount at once in a volatile market, spreading investments over six to eight months can help manage timing risk.
The expert said that the investor can continue investing in the same existing funds like investing in ICICI Largecap, Parag Parikh Flexicap and some amount in Kotak and Bandhan smallcap and midcap funds.
Incremental investments during market corrections of 4–5% can further improve average costs. Importantly, this money should be allocated to existing core funds instead of introducing new ones, Kothari said.
The expert further said that, “whenever there is a fall in the market, by say 4-5%, at that time he should do some futures also, from his debt fund to equity fund, but six to eight months is a reasonable time right now with the current context because last one year market has been completely flat. So, from a correction perspective the market has already gone through time correction and now markets are not expensive, markets are fairly valued now.”
Also Read | Investing Rs 95,000 a month through mutual fund SIPs - Can it build a Rs 5 crore corpus in 15 years?
Overall, the takeaway for investors is clear: discipline, long-term thinking, and risk appetite are important, but portfolio simplicity matters just as much. A focused set of well-chosen funds, combined with a realistic time horizon and a phased investment strategy, can often deliver better outcomes than a crowded portfolio chasing diversification.
One should always consider their risk appetite, investment horizon and goals before making any investment decision.
( Disclaimer : Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
If you have any mutual fund queries, message on ET Mutual Funds on Facebook/Twitter. We will get it answered by our panel of experts. Do share your questions on ETMFqueries@timesinternet.in alongwith your age, risk profile, and twitter handle
Raj Yadav is an investor and a viewer of The Money Show on ET Now. He is investing with SIPs of Rs 5,000 each across several equity, gold, and multi-asset schemes, taking his total monthly SIP to around Rs 45,000. Alongside this, he has also made lumpsum investments of about Rs 5 lakh each in select equity-oriented and hybrid funds. With an additional Rs 30 lakh planned for investment and ability to take risk, his financial goal is: building a Rs 4 crore corpus over the next 10 years.
Also Read | Tech mutual funds emerge worst performers across horizons. Should investors buy more or stay invested?
His SIP portfolio includes Parag Parikh Flexicap, ICICI Largecap, Motilal Oswal Large and Mid, Franklin India Opportunities, SBI gold, ICICI Multi Asset, Kotak Midcap, Bandhan Smallcap whereas the lumpsum portfolio includes ICICI Large, HDFC Balanced Advantage, Parag Parikh Flexicap ICICI Multi Asset.
The expert, Nikhil Kothari, Director, Etica Wealth, reviewed the portfolio and said that he has done a long-term SIP, his goals are long-term, and he is continuing SIPs for a reasonable amount of time, which Kothari regarded he did well.
The expert points out that the biggest risk in this portfolio is overdiversification. Most equity mutual funds already hold 40-50 stocks. When an investor owns 8-10 such funds, the combined portfolio effectively mirrors a large part of the market, according to Kothari.
In such cases, strong performance from some funds is often offset by weaker performance from others, resulting in returns that are broadly in line with the index, despite higher complexity and effort.
The recommendation is to limit the portfolio to four or five core funds across distinct categories. “So, in that case you are better off buying only one index fund instead of buying so many funds in the portfolio. So, I will say that you should not have more than four-five funds in a portfolio and that too from different categories, so that is the ideal strategy what one should have,” Kothari said.
A balanced structure could include one large cap fund, one flexi-cap fund, one midcap fund, and one smallcap fund. For the flexicap category, the expert recommended Parag Parikh Flexi Cap Fund and for the large cap, Kothari recommended ICICI Prudential Largecap Fund.
If the investor wants value as a strategy, then Motilal Oswal BSE Enhanced Value Index is also good. Since the investor already has exposure to gold and a multi-asset funds, SBI and ICICI Multi Asset Fund which he can also continue in the current context.
Kothari said that, “So, these are the good funds which he can have in the portfolio and incrementally whatever money he invests, he should invest in the same funds. He should not add any more funds in the portfolio because it will lead to extreme overdiversification and then what will happen is that few funds will outperform, few funds will underperform, and overall, his return is in line with the index.”
Also Read | Gold, silver ETFs slip up to 3% on US tariff uncertainty. What should investors do?
Another important aspect highlighted is the investment goal of achieving Rs 4 crore in 10 years. Targeting Rs 4 crore in just 10 years is considered aggressive, as compounding typically becomes more powerful over longer periods. Experts suggest extending the time horizon to 15–20 years, which would significantly improve the probability of achieving—or even exceeding—the desired corpus, assuming disciplined SIPs and reasonable market returns.
As for deploying the additional Rs 30 lakh, a staggered approach is advised. Rather than investing the entire amount at once in a volatile market, spreading investments over six to eight months can help manage timing risk.
The expert said that the investor can continue investing in the same existing funds like investing in ICICI Largecap, Parag Parikh Flexicap and some amount in Kotak and Bandhan smallcap and midcap funds.
Incremental investments during market corrections of 4–5% can further improve average costs. Importantly, this money should be allocated to existing core funds instead of introducing new ones, Kothari said.
The expert further said that, “whenever there is a fall in the market, by say 4-5%, at that time he should do some futures also, from his debt fund to equity fund, but six to eight months is a reasonable time right now with the current context because last one year market has been completely flat. So, from a correction perspective the market has already gone through time correction and now markets are not expensive, markets are fairly valued now.”
Also Read | Investing Rs 95,000 a month through mutual fund SIPs - Can it build a Rs 5 crore corpus in 15 years?
Overall, the takeaway for investors is clear: discipline, long-term thinking, and risk appetite are important, but portfolio simplicity matters just as much. A focused set of well-chosen funds, combined with a realistic time horizon and a phased investment strategy, can often deliver better outcomes than a crowded portfolio chasing diversification.
One should always consider their risk appetite, investment horizon and goals before making any investment decision.
( Disclaimer : Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
If you have any mutual fund queries, message on ET Mutual Funds on Facebook/Twitter. We will get it answered by our panel of experts. Do share your questions on ETMFqueries@timesinternet.in alongwith your age, risk profile, and twitter handle
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