Investors building an investment portfolio may be wondering how many funds it is wise to hold. Financial professionals generally believe that the ‘magic number’ is somewhere around 20, although for smaller portfolios, say less than £50,000 the number of funds to hold ideally falls to around 15. Here are some reasons why investors should not hold too many funds within a portfolio:
- Charges – funds have charges associated with them. It is not logical to pay charges on too many funds when an investor is exposed sufficiently to a sector as these extra charges will eat away at returns from the investment portfolio.
- Performance tracking – if an investor was to hold 60 funds in their investment portfolio, this would make it notoriously more difficult to track the performance of each fund in comparison to a portfolio with 20 funds. Limiting the number of funds in an investment portfolio also indirectly forces an investor to think carefully about removing poor performing funds and replacing them with better performing ones.
- Reduction of diversification – it is generally viewed that there is little point in holding too many funds that are similar in nature as this can actually reduce diversification.
- Less valuable portfolio – holding a greater number of funds means that an investor’s pot of money is spread across more funds, this means that top performing funds in a portfolio will not really be producing producing optimal returns in a portfolio due to the lack of meaningful allocation. Some believe that it is generally wise to allocate a minimum of 5 percent to each fund in an investment portfolio and increasing the allocation further in funds that an investor really believes strongly in.