Home / Business and Economy / Experts Caution Mutual Fund Investors: Overdiversification Can Dilute Returns
Experts Caution Mutual Fund Investors: Overdiversification Can Dilute Returns
12 Nov, 2025
Summary
- Holding more mutual fund schemes does not always mean better diversification
- Duplication of stocks across funds can complicate tracking and dilute returns
- Optimal number of funds depends on portfolio size, ranging from 3-4 to 8-10
As of 2025-11-12T13:08:19+00:00, financial planners caution that mutual fund investors should not assume that holding more schemes automatically means better diversification. According to Aditya Agarwal, Co-founder of Wealthy.in, most equity mutual funds already hold between 40 and 100 stocks, and when investors add too many funds, they often end up holding the same stocks through different schemes. This duplication does not reduce risk but only complicates tracking and can dilute returns.
Agarwal explains that over-diversification can make a portfolio harder to manage without meaningfully lowering volatility. Instead, investors should focus on holding a few well-chosen funds that represent different market segments. For portfolios up to ₹25 lakh, 3-4 funds are generally sufficient, while for ₹50 lakh portfolios, 4-6 funds may be adequate. Even larger portfolios of ₹1 crore or more rarely need more than 8-10 funds, as beyond that, the added complexity offers little benefit.
Investors are advised to periodically review fund factsheets to detect hidden overlap and ensure their overall portfolio remains diversified, avoiding unintended concentration in specific stocks or sectors.
