How many funds should one invest in for the right amount of diversification?
The diversification can be across assets—cash, equity, gold, real estate and bonds or within these asset classes
How many funds should one invest in for the right amount of diversification?
Srividya Prakash, Bengaluru
The concept of diversification is the one which says that one should hold multiple funds to reduce the overall risk in a portfolio. The diversification can be across assets—cash, equity, gold, real estate and bonds or within these asset classes. For instance, within equities, the diversification could be large-cap, mid and small-cap and sector funds and so on. As an investor you could also diversify across the style of investment whereby you can choose funds across fund houses to ensure that multiple styles of management are employed across the holdings in one’s portfolio.
By and large any equity mutual fund provides an automatic diversification of some form. Investing through systematic investment plans furthers the diversification game, so, for a whole lot of investors, investment in a single mutual fund provides diversification, whereas for a seasoned investor a set of 3-4 funds is good enough by way of diversification. Do not complicate diversification by the number of funds in which one has invested.