Should you hold too many mutual funds?

As it is rightly said that, “Too many cooks spoil the soup”. In case of mutual funds also this holds true. Too many mutual funds won’t help you much in achieving your objectives. In fact, it proves to be the most inefficient way of investing. Holding too many mutual funds would lead to over-diversification which actually you don’t require. This will make you incur a huge opportunity cost.
 
It is important to understand that investing in too many mutual funds doesn’t mean diversification. Spreading your investment over different asset classes means diversification. Investment in mutual funds beyond a certain limit won’t give you diversification benefit. To understand this let’s take an example, consider you are investing in Fund A and Fund B both are from large-cap categories. So there are high chances that both of them have invested in the same stocks.
 
So beyond a certain limit investment in too many mutual funds of the same category won’t be able to give you diversification benefit. It may lower your risk. However, such a portfolio may not give you any sort of high returns. So investing in maximum two funds of the same category is enough to give you the overall diversification benefit. Overdoing anything would lead you to the results which are not satisfactory and the same goes with mutual funds as well.
 
In such scenarios, it is better to have a financial plan in place which would guide you in every aspect of your personal finance and would also help you make wise decisions while investing in mutual funds and link those mutual funds to your financial goals.