1. While a portfolio with a single mutual fund has the highest standard deviation, i.e. delivering either the biggest gains or suffering the heaviest losses, addition of mutual funds brings down the standard deviation significantly, thus reducing the risk.
2. However, after reaching a critical number, a portfolio’s standard deviation remains pretty much the same regardless of the number of mutual funds added.
3. Therefore, there is no need for more mutual funds once you reach a critical number in your portfolio.
4. Also, you will not be able to remove the under-performers due to the difficulty in tracking them.
5. Having too many mutual funds will also not reflect the true returns of good schemes because their contribution will be diluted by the slackers in your portfolio.
6. For a successful mutual fund portfolio, a need-based selection would be most appropriate, i.e. by identifying a list of short-term, medium-term and long-term needs/objectives/goals.
7. The cash/short-term need would be best met by investing in a liquid/short-term debt fund.
8. The medium-term objectives could be met by investing in a dynamic bond debt fund and a multi-cap equity fund.
9. The long-term goals can be taken care of by investing in a balanced fund and a mid-cap fund.
10. If it is difficult to segregate medium-term and long-term goals, it would be best to invest in a balanced fund and a mutli-cap fund.
11. Investment in a fund should always be through SIPs with initial selection based on its ratings, and annual reviews thereafter.
12. Individual risk perception should decide your equity-debt allocation for periodic re-balancing.
2. However, after reaching a critical number, a portfolio’s standard deviation remains pretty much the same regardless of the number of mutual funds added.
3. Therefore, there is no need for more mutual funds once you reach a critical number in your portfolio.
4. Also, you will not be able to remove the under-performers due to the difficulty in tracking them.
5. Having too many mutual funds will also not reflect the true returns of good schemes because their contribution will be diluted by the slackers in your portfolio.
6. For a successful mutual fund portfolio, a need-based selection would be most appropriate, i.e. by identifying a list of short-term, medium-term and long-term needs/objectives/goals.
7. The cash/short-term need would be best met by investing in a liquid/short-term debt fund.
8. The medium-term objectives could be met by investing in a dynamic bond debt fund and a multi-cap equity fund.
9. The long-term goals can be taken care of by investing in a balanced fund and a mid-cap fund.
10. If it is difficult to segregate medium-term and long-term goals, it would be best to invest in a balanced fund and a mutli-cap fund.
11. Investment in a fund should always be through SIPs with initial selection based on its ratings, and annual reviews thereafter.
12. Individual risk perception should decide your equity-debt allocation for periodic re-balancing.