Investor Corner/The wider picture/Risk, Regulation & Advanced Ideas
5.3.4 Diversification Limits
Too few holdings creates concentration risk. Too many, often fifteen to twenty overlapping funds, creates clutter without any real additional diversification benefit. A well-chosen set of four to eight funds usually strikes a sensible balance.
The two failure modes
Holding a single fund, or a small handful of very similar ones, leaves a portfolio exposed if that specific strategy or fund manager has a genuinely bad stretch. At the other extreme, holding fifteen or twenty funds across similar categories often just means each fund quietly holds many of the same large, well-known stocks as the others, adding paperwork and complexity without adding any genuine diversification benefit.
Why more funds does not automatically mean more diversification
Diversification comes from combining assets that behave differently from each other, not simply from owning a larger number of them. Two large cap funds from different AMCs likely hold significant overlap in their top ten or twenty positions, since both are drawing from a similar universe of large, well-established companies, meaning a fifth or sixth large cap fund adds little that the first one did not already provide.
A practical guideline
A reasonable starting point is somewhere between four and eight carefully chosen funds spanning genuinely different categories and asset classes, rather than judging sufficiency purely by the total count of funds held. Checking overlap directly, rather than assuming that more funds automatically means safer, more thorough diversification, is the more reliable approach.
How PriLytics helps. PriLytics shows the true asset allocation across every fund you hold, making overlap and unnecessary duplication easy to spot rather than something you have to calculate manually. See your true asset allocation.