Can an investor afford to handle too many mutual funds?

Most investors believe a well-balanced portfolio should have around 20 to 30 stocks to minimize the amount of unsystematic risk. One mutual fund is equivalent to about six stocks. Hence, is one mutual fund enough?

For people who stipulate one fund is enough, equity investors purchase a broad index fund such as the Vanguard Total Stock Market Fund, and let that fund work through time. Through a single balanced fund, investors looking for exposure to both bonds and stocks may achieve their desired asset allocation.

Conversely, other individuals believe a single fund won’t give sufficient exposure to global investments. The fund provides a little bit of everything, but not enough of anything. A large-cap domestic fund and a small-cap domestic fund cover the bases on the home front, while an international fund (likely two at most) hold the global front. Two-fund proponents choose one fund from developed foreign markets and the other from emerging markets. To obtain a fixed-income exposure, a domestic bond fund is integrated, making it six.

Style Box and Diversification

A conventional mutual fund style box is comprised of nine investment categories based on the following: market capitalization and investment style. The bond style box has three maturity categories and credit quality categories. An investor need not a fund in all those classifications. All he needs to do is to pick the best ones that are suitable to his asset allocation and risk-return requirements.

Mutual funds have become popular and more attractive due to its exposure in numerous stocks in a single investment instrument. But having too much can hurt your portfolio, leading to an expensive index fund, a notion based on the fact holding too many funds rolls back the positive performance of any single fund, while the expense ratios of several funds add up to the number higher than average. Therefore, it defeats the real essence of diversification.

How many mutual funds should an investor have? There is no really magical, right number of mutual funds for one’s portfolio. But an investor need not to own dozens of holdings. As a matter of fact, every mutual fund firms offer life-cycle funds. One needs to select one life-cycle fund, place all of the money into the fund, and let it work until your golden years. This fund is difficult to outmatch because of its natural appeal.