Too many funds, too little growth: How over-diversification of portfolio can quietly kill your wealth

For years, retail investors have operated under a simple assumption: the more mutual funds you hold, the safer your portfolio becomes. On the surface, it feels logical — more schemes, more diversification, less risk. But financial experts warn that this belief is not just misleading, it may be silently draining long-term wealth.

Across the mutual fund landscape, data consistently shows that diversification benefits plateau after a certain point. Most equity mutual funds, especially within the same category, hold 40–70 stocks, many of which overlap significantly. As portfolio complexity rises, actual diversification barely improves — but the dilution of returns becomes very real.

Investment advisors believe that 13–14 funds are more than enough for even advanced investors. Anything beyond that usually creates duplication rather than true risk reduction. Managing 20–30 funds, they say, becomes less about strategy and more about juggling paperwork. Regular portfolio reviews often reveal that many schemes can be trimmed without affecting diversification at all.

CA Nitin Kaushik explains the psychological trap well. “You start your investment journey with excitement — one good fund, a smooth SIP. Everything feels under control. Then you speak to friends, see YouTube recommendations, and suddenly your portfolio looks like a salad bowl of 12–15 funds,” he says. “It feels smart. But beyond a point, it quietly stops adding value.”

The illusion of diversification stems from stock overlap. Most large-cap funds hold the same market heavyweights — Reliance, HDFC Bank, ICICI Bank, Infosys, TCS. Buying five large-cap funds doesn’t spread risk; it simply multiplies exposure to the same companies. Kaushik puts it bluntly: “That’s like buying the same house in five different societies — different names, same neighbourhood.”

Research from Value Research indicates that 60–70% overlap is common among funds in the same category. As overlap rises, returns start converging too. The investor ends up with average outcomes while strong performers get drowned out by mediocre ones. Meanwhile, the effort required to track, review, and rebalance the portfolio shoots up.

Seasoned advisors recommend focusing on categories, not the number of funds. A well-constructed equity portfolio behaves like a balanced cricket team — a mix of dependable large-caps, growth-oriented mid-caps, and a few stable debt or index components. For most investors, 3–5 carefully chosen funds can deliver robust diversification without clutter.

A simple structure often works best:

1–2 diversified equity or flexi-cap funds

1 mid-cap or small-cap fund for long-term growth

1 index or debt fund for stability and downside protection

Experts caution that chasing “Top 10” lists or adding new funds every few months leads to a portfolio built on trends, not goals. True diversification must align with time horizons and financial objectives, not sheer fund count.

Over-diversification also masks a critical danger — hidden stock overlap, often crossing 40–50%. Tools and fund fact sheets help investors detect duplication and consolidate where necessary.

Ultimately, wealth doesn’t grow in chaos; it compounds in clarity. Having fewer, well-selected funds builds conviction, simplifies monitoring, and keeps the investment plan disciplined. So the next time someone proudly says, “I have 14 mutual funds — I’m well-diversified,” remember: quality beats quantity. Always.