Mutual funds are a popular and convenient way to invest money. They allow investors to purchase a basket of stocks and bonds in one transaction, diversifying their portfolio and giving them access to a wide range of investments.
With mutual funds, investors can benefit from professional asset management without the need to do all the research and analysis themselves. But should you invest in multiple mutual funds?
In this article, we’ll explore the benefits and drawbacks of investing in multiple mutual funds and discuss whether or not it’s a smart investment strategy. Before we dive into the pros and cons of investing in multiple mutual funds, let’s take a look at what mutual funds actually are.
What are mutual funds?
Mutual funds are investment vehicles that pool the money of various investors together to buy a basket of stocks, bonds, or other securities. The fund is managed by a professional fund manager who makes decisions about which securities to buy and sell based on experience and research.
By investing in a mutual fund, investors can gain exposure to a range of investments without having to do all the research and analysis themselves. There are two main types of mutual funds: actively-managed funds and passively-managed index funds.
Actively-managed funds are run by fund managers who actively select investments and adjust the portfolio according to their own judgment. Passive funds, on the other hand, mirror a stock market index and aim to replicate its performance without active management.
What are the benefits of investing in multiple mutual funds?
Diversification
The primary benefit of investing in multiple mutual funds is diversification. Diversification is an important part of any investment strategy as it helps to reduce risk by spreading your investments out over a range of different assets.
By investing in multiple mutual funds, you can gain exposure to a variety of different markets, sectors, and asset classes. This helps to reduce the overall risk of your portfolio and ensures that you don’t put too many eggs in one basket.
Access to professional management
One of the major benefits of investing in mutual funds is that you get access to professional asset management. Mutual funds are managed by experienced fund managers who have years of experience in selecting investments and adjusting portfolios to ensure optimal performance.
By investing in multiple mutual funds, you can benefit from the expertise of a number of different fund managers. This can be especially beneficial if you don’t have the time or knowledge to manage your own investments.
Cost efficiency
Another major benefit of investing in multiple mutual funds is cost efficiency. Mutual funds typically come with lower fees than individual stocks, exchange-traded funds (ETFs), or other investments. By investing in multiple funds, you can spread these costs out to make sure they don’t become too high.
Reduced volatility
Another advantage of investing in multiple mutual funds is that it can reduce volatility. Investing in a single fund has more volatility than investing in several funds. By investing in multiple mutual funds, you can spread out the risk associated with any one fund and reduce overall volatility.
What are the drawbacks of investing in multiple mutual funds?
Potential for over-diversification
Despite the benefits of diversification, there is a potential for over-diversification when investing in multiple mutual funds. When you spread your investments too thinly, it can lead to underperformance, as each individual investment may not be able to generate sufficient returns to offset the costs of the fund.
Complexity in tracking
Another potential drawback of investing in multiple mutual funds is the complexity it can add to your portfolio. With multiple funds, you have to keep track of all the different investments you own, as well as the performance of each fund.
This can be difficult to manage on your own, especially if you have a large number of funds. Additionally, trying to coordinate all the different investments can be time-consuming, and it can be hard to keep track of when you need to rebalance your portfolio.
Higher transaction costs
Investing in multiple mutual funds also comes with higher transaction costs. Each time you buy or sell a fund, you will incur trading fees. Over time, these can add up and eat into your returns. Additionally, some funds may require additional fees such as annual maintenance fees or redemption fees.
Investing in multiple mutual funds can be a smart move for investors who want to diversify their portfolios and gain access to professional asset management.
However, it’s important to be aware of the possible drawbacks, such as the potential for over-diversification and higher transaction costs. Ultimately, the decision to invest in multiple mutual funds should be made on a case-by-case basis depending on your individual needs and goals.
Too many mutual funds
First Published: 17 Mar 2023, 08:46 AM
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FAQs
While mutual funds are popular and attractive investments because they provide exposure to a number of stocks in a single investment vehicle, too much of a good thing can be a bad idea. The addition of too many funds simply creates an expensive index fund.
Is it a good idea to invest in multiple mutual funds? ›
The decision to invest in one fund or multiple funds depends on your investment goals, risk tolerance, and diversification strategy. Investing in one fund can be simpler and more straightforward, while multiple funds can offer broader diversification across different assets and sectors.
Is it better to invest in multiple funds or just one? ›
It's important to make sure that your portfolio is well-diversified, but holding too many funds means there's a risk some may overlap. The value of investments can fall as well as rise and you could get back less than you invest. If you're not sure about investing, seek independent advice.
What are the pros and cons of mutual funds? ›
One selling point is that they allow you to hold a variety of assets in a single fund. They also have the potential for higher-than-average returns. However, some mutual funds have steep fees and initial buy-ins. Your financial situation and investment style will determine if they're right for you.
What is one advantage of many mutual funds? ›
One of the primary benefits is diversification, which reduces the risk of loss by spreading investments across a wide range of assets. Mutual funds also provide professional management, allowing you to leverage the expertise of fund managers who make investment decisions based on their research and analysis.
How many mutual funds should you own? ›
While there is no precise answer for the number of funds one should hold in a portfolio, 8 funds (+/-2) across asset classes may be considered optimal depending on the financial objectives and goals of the investor. Further, higher allocation of portfolio to the right fund is of crucial importance.
Should I put all my savings in mutual funds? ›
There is nothing wrong in this because mutual funds offer a variety of asset classes that match your requirement. You can invest in a combination of Debt funds (low risk low return) and Equity Funds (higher risk, higher return) based on your risk profile.
How much overlap is good in mutual funds? ›
While there's no fixed rule, a lower overlap is better for diversification. Aim to keep it below 33% for a balanced portfolio. To reduce overlap: Diversify across fund categories systematically: Investing in funds from different categories won't guarantee low overlap unless chosen strategically.
What is the best mutual fund to invest in? ›
5 Best Mutual Funds to Buy Now
| Mutual Fund | Assets Under Management | Expense Ratio |
|---|
| Vanguard Wellington Fund (ticker: VWELX) | $111.7 billion | 0.26% |
| Vanguard Total Stock Market Index Fund (VTSAX) | $1.6 trillion | 0.04% |
| Fidelity 500 Index (FXAIX) | $512.4 billion | 0.015% |
| Fidelity ZERO International Index (FZILX) | $4 billion | 0% |
1 more rowMay 10, 2024
If you are a moderate-risk investor, it's best to start with a 60-30-10 or 70-20-10 allocation. Those of you who have a 60-40 allocation can also add a touch of gold to their portfolios for better diversification. If you are conservative, then 50-40-10 or 50-30-20 is a good way to start off on your investment journey.
The 10 Riskiest Investments
- Options. An option allows a trader to hold a leveraged position in an asset at a lower cost than buying shares of the asset. ...
- Futures. ...
- Oil and Gas Exploratory Drilling. ...
- Limited Partnerships. ...
- Penny Stocks. ...
- Alternative Investments. ...
- High-Yield Bonds. ...
- Leveraged ETFs.
Downside risk usually causes investments to lose value in the short term. Stock and bond markets may generate positive results over the long term, but market events can cause specific investments or sectors to decline in value in the short term.
Who should not invest in mutual funds? ›
Lack of Control. Because mutual funds do all the picking and investing work, they may be inappropriate for investors who want to have complete control over their portfolios and be able to rebalance their holdings on a regular basis.
What is the risk of investing in mutual funds? ›
The securities held in a mutual fund may lose value either due to market conditions or to the performance of a specific security, such as the stock of a company if the company performs poorly.
Which type of mutual fund is best for long term? ›
For long term investments, consider equity funds as they offer the potential for the best returns. Choosing a growth mutual fund option can help you achieve your long-term goals as your returns will grow through compounding over time.
How to pick a mutual fund? ›
Here are six steps to pick a mutual fund:
- Set your goals.
- Consider passive vs. active funds.
- Review types of mutual funds.
- Hone in on specific funds.
- Review the fund's prospectus.
- Look at costs and fees.
Some investors choose to work with multiple brokerages to mitigate risk and protect their assets. Spreading your assets across different brokerage accounts can help protect you against potential fraud or unauthorized access, Roller says. If one broker has a breach, then you can still trade with another investment firm.
What if I invest $1,000 in mutual funds? ›
Investing Rs 1,000 per month should not be a big deal for anyone to save their future. Now, if you invest Rs 1,000 in an MF SIP and get a 12 per cent return, you can become a crorepati at the age of 60. At a 12 per cent rate of return, a Rs 1,000 SIP may earn you Rs 1,14,00,000.
How many mutual funds should I have in my 401k? ›
We're talking about the usual suspects here: stocks (and a wide variety of stock types), bonds, and alternative investments such as gold. A commonly cited rule of thumb is to own between 10 and 20 mutual funds, but the actual number will vary depending on your individual circ*mstances.
