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.
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
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.
Is investing in multiple mutual funds good or bad? ›
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.
What are the pros and cons of investing in mutual funds? ›
Mutual funds allow investors to dollar-cost average over time and reinvest dividends, enabling compound growth. However, taxes on capital gains distributions and dividends can make them less tax-efficient. While mutual funds provide diversification, they still carry market risk based on the underlying securities.
Is it better to invest in multiple funds? ›
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.
Is investing in mutual funds good or bad? ›
Mutual funds can be good for diversification and professional management, but like any investment, they come with risks. It depends on individual financial goals and risk tolerance.
Is it beneficial to have multiple investment accounts? ›
Multiple Brokerages Help Diversify and Manage Risk
A benefit of owning multiple brokerage accounts is they can help diversify your holdings.
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.
What are the pros and cons of investing in funds of funds? ›
Though FOFs provide diversification and less exposure to market volatility, these returns may be lessened by investment fees that are typically higher than traditional investment funds. Higher fees come from the compounding of fees on top of fees.
What is downside in mutual fund? ›
What Is Downside Risk? Downside risk is an estimation of a security's potential loss in value if market conditions precipitate a decline in that security's price. Depending on the measure used, downside risk explains a worst-case scenario for an investment and indicates how much the investor stands to lose.
Is it better to invest in one thing or multiple? ›
Diversifying a portfolio can help reduce risk by spreading out the investment into multiple stocks, sectors, or investments. If one stock or sector declines, the portfolio can weather the loss better since the money is allocated throughout many investments.
By investing in several index funds tracking different indexes you can built a portfolio that matches your desired asset allocation. For example, you might put 60% of your money in stock index funds and 40% in bond index funds.
What is a good investment multiple? ›
Determining a “Good” Equity Multiple:
However, in general, a higher equity multiple indicates a more profitable investment. Investors typically aim to achieve an equity multiple greater than 1.0, indicating that their investment has generated a return greater than the initial equity invested.
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 the safest mutual fund to invest in? ›
- Canara Robeco Bluechip Equity Fund - Growth. ...
- ICICI Prudential Value Discovery Fund - Growth. ...
- Kotak Bluechip Fund - Reg - Growth. ...
- Nippon India Large Cap Fund - Reg - Growth. ...
- HDFC Index Fund-NIFTY 50 Plan. ...
- ICICI Prudential Nifty 50 Index Fund - Reg - Growth. ...
- UTI Nifty 50 Index Fund - Growth.
Because most mutual funds offer a level of built-in diversification, they're typically considered a lower risk investment. However, as with all investments, there are still risks involved, and mutual fund returns aren't guaranteed.
Is it good to invest in 5 different mutual funds? ›
Investing in many large cap mutual funds is not necessary. One well-chosen large cap mutual fund should be enough. Mid cap equity mutual funds invest in mid cap companies only. Mid cap companies grow at much higher rates when compared to large cap companies.
How many different mutual funds should I invest in? ›
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.
Is it better to invest in one index fund or multiple? ›
Some index funds provide exposure to thousands of securities in a single fund, which helps lower your overall risk through broad diversification. By investing in several index funds tracking different indexes you can built a portfolio that matches your desired asset allocation.
Is it safe to put all money in mutual funds? ›
Mutual funds are largely a safe investment, seen as being a good way for investors to diversify with minimal risk. But there are circ*mstances in which a mutual fund is not a good choice for a market participant, especially when it comes to fees.
