With thousands of funds on offer, it can be a challenge to know how many Funds to invest in. You may have settled on one or two funds, but in order to reduce risk and generate a diversified portfolio you should look at investing in a range of funds to counter the lows with the highs.
Three is a Magic Number? Unfortunately Not
When deciding to how many funds to invest in, there is no fixed number or optimal number that works for all. The value you have to invest, the length you are likely to invest for, the risks you are willing to take will influence the number of funds to invest in as you diversify your portfolio as well as the type of funds you hold.
Funds with exposure to equities, bonds, commodities (such as Gold) and property provides good diversification.
However, this may not be suitable for all. Like any investment, a good selection process all starts with you and understanding your needs. If you are looking to take on risk with a very long-term horizon, you may not only invest in Equity Funds but also Equity Funds that invest in smaller companies with ability for high growth.
Regardless of your goals, you should always remember to balance out the higher risk with the lower risk assets, at a simple level this could be the risk of Equity Funds out-weighed by the lower risk of Bond Funds.
Is it Possible to Hold too Many Funds? Yes!
In a quest for diversification, it is easy to buy and hold many different funds. If you do this, you do run a risk of duplicating your investments – which in turn can be counter-productive and just adding to the time you need to monitor your investments.
For example, as an Equity Fund could hold in the region of 100 shares. If you had invested in multiple Equity Funds (investing in similar areas, e.g. UK Equities), then it is likely you will be investing in the same shares but in different Funds. So you are not really diversifying your portfolio – more adding to your increasing holdings.
This is why it is very wise to check the Fund Factsheets and check the top holdings of the funds you are investing in as well as the investing strategy deployed by the Fund Manager.
Holding these extra funds will cost you more time in monitoring the performance of them, but it will also cost you more time as you re-balance your portfolio (i.e. selling assets which become ‘overweight’ as they grow to re-balance your portfolio in line with your original goals).
Enter the Multi-Asset Fund…
A Multi-Asset Fund can be a compromise between diversifying your portfolio but not actually buying many funds. This is because a Multi-Asset Fund essentially invests in a range of different asset classes (such as equities, bonds and property) but as part of a single fund.
A similar concept is the Multi-Manager Fund, this will bundle together many different funds but you will invest in one Fund overall. This can give you more diversification across an asset class or classes.
Both types of funds do come with an increased cost to invest in.
Make the Right Choice for your Circumstance
Holding a number of funds in different asset classes is wise to ensure you are protected against downturns in the market and in particular sectors. There are many ways to do this, but the decision starts with your goals, attitude to risk and length of investing.
Multi-Asset Funds and Multi-Manager Funds can give you a shortcut to rapid Diversification and increase the number of funds you hold – but do come at an additional cost.
Unfortunately there is no magic number, but it’s good practice to try and keep a good balance between those investments that are more risk and less risky. If you do choose to invest in one type of asset class, then be sure to hold more than one fund to compliment its holdings, but be careful of duplication!