How many funds should you hold in your portfolio?

What you’ll learn:

• Why holding too many funds means you could end up inadvertently over-exposed to one particular sector or area
• Why re-balancing your portfolio is important
• How multi-asset funds may provide a one-stop shop.

Conventional investing wisdom is that that putting their money into a range of different funds can help investors spread their risk.

That’s because if you invest into several different types of asset, as well as different geographical areas, if one of these assets or regions underperforms, hopefully some of your other investments will perform better, helping compensate for any losses.

Remember, however, that no matter how much you diversify your investments, they could still fall in value and you could get back less than you invest.

Knowing exactly how many funds you should hold in your portfolio isn’t always easy. Here, we explain why there’s no ‘magic number’ of funds to hold, and how there are funds available that can provide a single solution for investors seeking diversification.

Understand what you are investing in

When assessing whether you have the ‘right’ number of funds in your portfolio, the key point to consider is whether the number you hold can help you achieve your desired results, based on your approach to risk, and the time period you’re investing over.

For example, if you are comfortable accepting a high level of risk in return for potentially higher growth, you may decide to allocate more money into funds investing in shares. If you prefer to focus on lower-risk investments, you may want to include more funds that invest in bonds and gilts, which are bonds issued by the UK government.

Remember that investments should be held for at least five years, but preferably longer. They can fall as well as rise in value, so there’s the risk you could get back less than you put in.

Some funds focus on a specific geographical area, type of investment or sector. Others are more general and invest across several regions and sectors. Each fund typically holds dozens of underlying investments. If, for example, you invest in 20 different funds, you could be holding as many as 1,000 different stocks, and there’s a risk that you could be duplicating some of your investments.

You can find out more about each fund’s objectives, and risk and reward profile from the fund’s key investor information document (KIID), which you must read before you invest. If you hold several funds with the same investment objective and similar holdings, your portfolio may be overly concentrated or ‘overweight’ in one particular area, and you may want to consider rebalancing it. Remember, diversification comes from spreading your money across many different underlying investments, and not just by holding multiple funds.

Understanding when you have too many funds

While it’s important to make sure your portfolio is properly diversified, having too many funds can make it difficult to keep track of your investments.

You should therefore only keep as many funds in your portfolio as you’re comfortable monitoring. For example, if you hold 10 or 20 different funds, you’ll need to keep a close eye on the changing value of all these investments to make sure your asset allocation still matches your investment goals. If your time is limited, you may find it easier to keep an eye on the performance of a smaller number of funds.

It’s also important to remember that when parts of your portfolio perform strongly, they’ll become a larger part of your asset allocation, which means your asset mix can change.

If this happens, you may need to rebalance your portfolio and make changes so that the funds you hold have a chance of meeting your objectives.

Remember that no matter how you tweak your holdings, investments still carry risk. They can fall in value as well as rise and you may get back less than you invest.

How multi-asset funds may help

A multi-asset fund can provide a single solution for investors looking for diversification but who perhaps aren’t comfortable monitoring several different funds themselves, or who might not have the time.

As the name suggests, a multi-asset fund invests in a range of different assets, with the fund manager responsible for getting the balance of investments. There are different types of multi-asset funds, which have different investment objectives. The right variety of asset mix for you will depend on your attitude to risk. For example, if you have a strong appetite for risk, you may decide to invest in multi-asset fund with a higher proportion invested in shares than other assets, whereas if you are more cautious, you may prefer a multi-asset fund with a lower proportion in shares.

Taking on more risk can mean potentially higher returns but there’s also a greater chance of losing money. On the other hand, less risky investments may provide you with more secure returns (albeit that they too can still fall in value), but these are likely to be lower.

Multi-asset funds may be multi manager funds, which build a portfolio of different funds run by other managers. This gives the benefit of the manager’s investment decisions, but charges will usually be higher.

Again, you can find out the key features of these funds from their KIIDs.

Find out more about multi-asset funds

If you’re unsure where to invest, seek professional financial advice.