Why you likely have too many mutual funds or etfs (2024)

FAQs

Can you have too many mutual funds? ›

You don't need more than four to six schemes to diversify your portfolio. If you are investing a small amount, you don't need to invest in more than one or two schemes. Investing in every mutual fund category will not offer you the best return or diversification.

Holding too many ETFs in your portfolio introduces inefficiencies that in the long term will have a detrimental impact on the risk/reward profile of your portfolio. For most personal investors, an optimal number of ETFs to hold would be 5 to 10 across asset classes, geographies, and other characteristics.

Investors looking for diversification often turn to the world of funds. Exchange-traded funds (ETFs), index mutual funds and actively managed mutual funds can provide broad, diversified exposure to an asset class, region or specific market niche, without having to buy scores of individual securities.

Mutual funds are popular in part because they offer investors the opportunity to diversify, and therefore spread out their risk over a number of investments. Mutual funds appeal to people because they give average investors the opportunity to invest in professionally managed funds.

There isn't a strict rule, but between five and 10 funds is usually a good idea. That lets you allocate money to different types of funds and markets without doubling up too much. It's also a manageable number to monitor and won't cost you too much in trading fees.

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. If you're not sure about investing, seek independent advice.

ETFs are considered to be low-risk investments because they are low-cost and hold a basket of stocks or other securities, increasing diversification. For most individual investors, ETFs represent an ideal type of asset with which to build a diversified portfolio.

The consensus is that a well-balanced portfolio with approximately 20 to 30 stocks diversifies away the maximum amount of unsystematic risk.

Unlike mutual funds, an ETF trades like a common stock on a stock exchange. ETFs experience price changes throughout the day as they are bought and sold. *ETFs typically have higher daily liquidity and lower fees than mutual fund shares, making them an attractive alternative for individual investors.

Are ETFs and mutual funds risky Why or why not? ›

Both mutual funds and ETFs are considered low-risk investments compared to cherry-picked stocks and bonds. While investing in general always carries some level of risk, both mutual funds and ETFs carry about the same level. It depends on the individual mutual fund and ETF you're investing in.

You don't need more than four to six schemes to diversify your portfolio. If you are investing a small amount, you don't need to invest in more than one or two schemes. Investing in every mutual fund category will not offer you the best return or diversification.

Mutual Funds invest in securities, be it equity or debt, whose values fluctuate along with market movement. This makes them risky because NAV of the fund depends on the individual security values held in the fund's portfolio.

There's nothing wrong with opening multiple brokerage accounts. In fact, it may be beneficial.

The number of stocks you should own depends on factors like time horizon and risk appetite. While there is no "perfect" portfolio size, the generally agreed upon number is 20 to 30 stocks. A diversification strategy ensures that your money stays safe if one or a few assets dip.

International ETFs.

According to Vanguard, international ETFs should make up no more than 30% of your bond investments and 40% of your stock investments.

Over diversification is possible as some mutual funds have to own so many stocks (due to the large amount of cash they have) that it's difficult to outperform their benchmarks or indexes. Owning more stocks than necessary can take away the impact of large stock gains and limit your upside.

In fact, owning too many stocks can be detrimental to your portfolio, increasing your costs while not necessarily reducing your risk. “Over-diversification” can limit returns with no perceivable advantage of further risk reduction. With every stock you add to your portfolio, you lower its risk profile.

There's no absolute cutoff point that distinguishes an adequately diversified portfolio from an over-diversified one. As a general rule of thumb, most investors would peg a sufficiently diversified portfolio as one that holds 20 to 30 investments across various stock market sectors.

What is the problem with ETFs? ›

With little natural trading volume, an investor's sell order in a declining market could be filled at a poor (below net asset value) price. In other words, the ETFs could harm investors in rocky markets, even as do-it-yourself strategies are easily unwound or adjusted at fair prices.

In terms of safety, neither the mutual fund nor the ETF is safer than the other due to its structure. Safety is determined by what the fund itself owns. Stocks are usually riskier than bonds and corporate bonds come with somewhat more risk than U.S. government bonds.

All funds carry some level of risk. With mutual funds, you may lose some or all of the money you invest because the securities held by a fund can go down in value. Dividends or interest payments may also change as market conditions change.

There is no rigid rule to recommend a certain number of funds. Also, there is no one scientifically derived precise number of funds that one can have. The rationale for investing in more funds is to diversify. This helps in offsetting the risk of some of the investments turning bad or performing poorly.

With a mutual fund, you buy and sell based on dollars, not market price or shares. And you can specify any dollar amount you want—down to the penny or as a nice round figure, like $3,000. With an ETF, you buy and sell based on market price—and you can only trade full shares.

Number of ETFs globally 2003-2022

The number of exchange traded funds (ETFs) worldwide grew markedly during the period from 2003 to 2022. There were 8,754 ETFs globally in 2022, compared to 276 in 2003. As of 2022, ETFs worldwide managed assets up to almost 10 trillion U.S. dollars.

Mutual Funds: An Overview

Disadvantages include high expense ratios and sales charges, management abuses, tax inefficiency, and poor trade execution. Here's a more detailed look at both the advantages and disadvantages of this investment strategy.

Mutual funds are bought and sold at net asset value (NAV) and only at the end of the trading day. However, like stocks, ETFs are bought and sold at a market price and can be traded intraday. ETFs also typically have lower initial costs and lower expense ratios than mutual funds.

The primary reasons why an individual may choose to buy mutual funds instead of individual stocks are diversification, convenience, and lower costs.

Why do people choose mutual funds? ›

Risk Diversification — Buying shares in a mutual fund is an easy way to diversify your investments across many securities and asset categories such as equity, debt and gold, which helps in spreading the risk - so you won't have all your eggs in one basket.

Mutual funds help investors diversify unsystematic risks by investing in a diversified portfolio of stocks across different sectors. While individual stocks have both unsystematic and systematic risks, mutual funds are only subject to systematic risk or market risk.

ETFs have transparent and hidden fees as well—there are simply fewer of them, and they cost less. Mutual funds charge their shareholders for everything that goes on inside the fund, such as transaction fees, distribution charges, and transfer-agent costs.

These funds concentrate their assets on a relatively small number of thinly traded stocks. If the fund attracts too much money, the fund manager may have trouble purchasing additional large blocks of thinly traded shares without driving up their prices by doing so.

Majority of American Households Own Mutual Funds, Ownership Occurs Across All Ages and Incomes. Washington, DC; October 31, 2022—According to new research published today by the Investment Company Institute (ICI), 68.6 million, or 52.3 percent of, households in the United States owned mutual funds in 2022.

For instance, most mutual funds hold well over 100 securities. For someone with a small sum to invest, building and managing a portfolio containing that many securities could potentially be highly impractical, if not impossible.

Mutual funds offer diversification or access to a wider variety of investments than an individual investor could afford to buy. There are economies of scale in investing with a group. Monthly contributions help the investor's assets grow. Funds are more liquid because they tend to be less volatile.

Investing is an effective way to put your money to work and potentially build wealth. Smart investing may allow your money to outpace inflation and increase in value. The greater growth potential of investing is primarily due to the power of compounding and the risk-return tradeoff.

Lower costs: Because you have multiple funds within the same family, selling and buying shares across the family will generally cost less than investing in funds with different companies. Some funds will even allow shareholders to invest in other mutual funds within the mutual fund family at lower minimum levels.

Are all mutual funds high-risk? ›

All Mutual Fund schemes do not carry the same risk when it comes to returns on investment. Equity schemes have the potential to deliver superior returns over the long term that can create wealth.

Mutual funds tend to be less risky than individual stocks, because they are more diversified — meaning they contain a mix of investments.

In this sense, mutual funds are seen as a 'safer' bet in comparison to equity stocks, due to their low risk quotient. Returns - While mutual funds offer investors very decent returns over a period of time, equity stocks have the potential to bring the investor extremely high returns over a much shorter period of time.

Ideally, 6 to 8 funds are good enough to build your MF portfolio. As the size of the portfolio increases, you may invest in a maximum of 10 funds to reduce the risk of being overdependent on any particular fund or fund house. However, the funds you are investing in are across equity, debt and hybrid categories.

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.

It's best to hold at least three or four mutual funds with different styles and objectives if you're like most investors. They should reduce volatility by combining fund types that don't share the same features. Stock funds may decline a great deal in value in a bear market.

It is crucial to implement 50:30:20 rule in your financial plan. One should invest at least 20% of their salary in mutual funds and can later increase whenever possible.

What Is a Good 10-Year Return on a Mutual Fund? The best-performing large-company stock mutual funds have produced returns of up to 17% in the last 10 years. It should be noted that average annualized returns have been higher than usual — at 14.70% during this time frame — driven by a multi-year bull market.

For stock mutual funds, a “good” long-term return (annualized, for 10 years or more) is 8% to 10%. For bond mutual funds, a good long-term return would be 4% to 5%.