How Many Funds Should I Consider Investing In? (2024)

If you’re looking for a convenient and low-cost way to build a diversified portfolio, investment funds could be a helpful solution.

These funds pool money from multiple investors and use it to purchase a range of assets such as shares and bonds. Gains and losses are then split between investors, who see the value of their holdings rise and fall.

But with so many funds available, it can be tricky to know exactly how many to consider including in your portfolio.

There’s no one-size-fits-all approach to selecting the right number of funds, and the number you ultimately choose will depend on several factors, such as your experience level, risk tolerance and how much you have to invest.

Here are some key factors to consider when deciding how many funds to include in your portfolio.

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Holding a small number of funds

For some investors, holding just a few funds could be a suitable strategy.

Nick Wood, head of fund research at Quilter Cheviot, says: “Having a small handful of funds allows you to have more conviction in a particular asset class, region or style. Clearly this involves more risk, however, if holding for a long term, it gives you the potential to generate good returns.”

Investing in a small number of funds can also be cost effective, since many investing platforms charge a dealing fee each time you buy or sell an asset. If you invest on a regular basis, these charges can eat into returns.

Equally, having a low number of funds makes it easier to keep track of your portfolio.

Wood at Quilter Cheviot says: “Having a small number of funds helps from an administrative perspective, as you can keep across your funds, the changes to them and the charges they levy in more detail.”

For new investors, choosing a few globally diversified tracker funds, for example, can be a good starting point.

Choosing a low number of funds may not be the best approach for every investor, however.

The main pitfall to avoid is building a portfolio that isn’t very diversified. If you hold a small number of funds, concentrated in a particular region, asset class or industry, just one of them performing poorly can have a significant impact on your portfolio as a whole.

Holding a large number of funds

Conversely, investing in a wide array of funds can result in a well diversified portfolio, provided you invest across multiple regions and/or sectors.

Xian Chan, head of investment and wealth solutions at HSBC UK, says: “If each fund covers a different asset class or geography, then consider several funds with different characteristics to form a diversified portfolio.”

If you opt for this approach, it’s a good idea to check each fund’s underlying assets. Since an underlying investment might feature in multiple funds, your portfolio may not be as diversified as it appears on the surface.

Jason Hollands, managing director atBestinvest, says: “Bear in mind that each fund will have exposure to between 35 and 500 underlying securities and so owning vast numbers of funds will inevitably result in significant overlap.”

Equally, though it might sound counterintuitive, holding a large number of funds runs the risk of over diversification.

Hollands says: “Diversification is a good thing, but there are limits to this. If your portfolio is spread across too many products and styles, you will effectively own the market and dilute the influence of the strongest performing [fund] managers.”

Investing in many different funds also means more dealing fees, and more time spent monitoring performance.

Chan at HSBC UK says: “An investor who wants greater control [of their portfolio] may choose different types of investment based on target asset allocation, spread across different asset classes and geographies.

“The trade off is time – it takes more time to monitor and track a larger number of funds and it could become more complex to rebalance.”

All-in-one funds

If you’re new to investing, or don’t feel confident choosing your own investment, opting for just one diversified fund – sometimes called a ‘ready-made’ portfolio – is an option worth considering.

These investments are designed to serve as an all-in-one solution for retail investors.

Chan at HSBC UK, says: “A diversified multi-asset investment works for those who want to defer to the experts and have them do the work for you.

“A single investment in a multi-asset fund with different asset classes and geographies may be sufficient.”

Key takeaways

What constitutes the ‘right’ number of funds varies depending on factors such as your level of experience, and how much time you want to commit to managing a portfolio.

Wood at Quilter Cheviot says: “The number of funds in a portfolio can range from 10 if you are just investing in global equities, to around 30 if you are investing regionally and looking to balance the risk and approach taken.”

According to Hollands, the average Bestinvest DIY investor holds between six and 12 funds in their portfolio: “If you want to construct your own portfolio and make your own asset allocation decisions, then half a dozen funds would be the minimum to get a presence across the major equity regions.”

However many funds you opt to invest in, it’s important to regularly check in on their performance.

Hollands cautions against investing in more funds than you’re able to track: “I believe the main reason some investors find themselves with such sprawling portfolios is not by deliberate design but is an outcome of a tendency to make ad hoc investment decisions, such as picking a new ISA fund each tax year-end.”

To keep an orderly portfolio, he recommends choosing an upper limit on the number of funds you hold, and sticking to it: “By setting yourself a limit like this, it forces you to reassess what you already hold and consider whether any of your existing holdings should make way for any new ideas that you might consider.”

If in doubt, a qualified, professional financial advisor can help you build a portfolio that matches your goals.