Think owning 10+ mutual funds means you’re diversified? Think again. A Certified Financial Planner explains why over-diversification is an illusion and how to build a truly balanced portfolio in 2025.
Many investors proudly say, “I have 10 different mutual funds, so I’m well diversified.”
I can tell you—that’s often far from the truth.
In fact, having too many mutual funds can hurt your returns and make your portfolio harder to manage.
The key is not how many funds you own, but how different they really are.
In this article, I’ll break down: –
- Why over-diversification is a problem?
- How fund overlap destroys real diversification?
- How to structure your mutual fund portfolio in 2025?
1. The Illusion of Diversification
True diversification means your investments are spread across different asset classes, market caps, sectors and styles.
But here’s the problem – many investors unknowingly buy multiple funds that are invested in the same set of stocks.
Example: –
If you own 4 large-cap funds, there is a good chance that they all have same securities in their top holdings.
Result: – Your risk is concentrated, even though it looks diversified.
2. The Overlap Problem
Fund Overlap occurs when two or more mutual funds hold the same securities. High overlap means you’re not getting the intended risk reduction.
Example from a recent portfolio review: –
- Fund A: 54% overlap with Fund B
- Fund B: 63% overlap with Fund C.
Even though the investor had 8 equity funds, they were essentially holding the same portfolio 3 times.
3. Why Too Many Funds Hurt You:
- Diluted Returns: Your best-performing fund gets “averaged out” by mediocre ones.
- Difficult Monitoring: Tracking 10+ funds is time-consuming and confusing.
- No Clear Strategy: Random fund additions lead to an unfocused portfolio.
4. What Real Diversification Looks Like
A Certified Financial Planner typically builds diversification in 3 dimensions:
-
Asset Class Diversification:
Equity, Debt, Gold, International funds, REITs, InvITs -
Market Cap Diversification:
Large-cap, Mid-cap, Small-cap funds in the right proportion -
Style Diversification:
Growth, Value, Momentum, Hybrid strategies
Pro Tip: You don’t need more than 6-8 carefully chosen mutual funds for most retail investors.
5. How a Professional Can Help You
A CFP or Financial Advisor can:
- Analyse your current portfolio for overlap
- Identify underperforming or redundant funds
- Rebalance into a clean, efficient portfolio
- Align investments with your long-term financial goals
Professional portfolio reviews can improve returns by reducing unnecessary overlaps and focusing on high-quality, complementary funds.
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