It is a good idea to diversify investments but knowing how many mutual funds you need in your portfolio can be tricky. Some people think one mutual fund is enough because it already contains a diverse stock catalog. 

However, investing solely in one fund is never a good idea. Spreading your money out over at least two or three funds gives you better protection during economic turmoil. 

Each investor is different, though. Your investment goals change throughout your life as you near retirement. When you are considering how many mutual funds you should have in your portfolio, you need to think about your timeframe, risk tolerance, and short and long-term goals. 

So, we created a guide to help you determine how many funds to buy. Keep reading to learn more. 

Basics of Diversification With Mutual Funds

Mutual funds offer you an easy way to diversify your investment portfolio. Most mutual funds have 100 or more assets, but some have 1,000 or more. There are mutual funds that focus on specific sectors and others that are diversified across several. 

Investment advisors suggest that a diversified portfolio should contain between 30 and 60 stocks. So, technically, adding just one mutual fund will offer you far more diversification than you can achieve on your own unless you have a substantial sum to invest. 

Mutual funds are much easier to purchase, and fund managers typically have extensive experience putting these funds together. If a fund does not perform well, investors will not buy it. So, fund management companies carefully curate the stocks. 

As an entry to a mid-level investor, it is unlikely that you have time to research and acquire all of the stocks in a substantial mutual fund, which is another reason these funds are so popular. 

Diversification Across Asset Classes

When deciding how to diversify your assets, there are multiple things to consider. Your situation will differ from other investors. So, it is important to consider where you are personally. 

Investment Goals

Mutual funds typically provide steady gains over a long period. Mutual funds are likely not the best option for you if you want to invest short-term for larger gains. 

Instead, investors looking for a quick payoff typically focus on individual stocks. If this is your goal, you may want to diversify your portfolio with one or two funds and invest the rest of your money in your specific stock picks. 

If you want to protect your money and increase the value of your investments at a slow, steady pace, adding more mutual funds can help you achieve that goal.

Risk Tolerance

When you are younger, your risk tolerance is higher. You have more time to recover from losses. So, you can take bigger risks. 

As you get older, you have to think about retirement. Taking the same investment risks you took when you were young is not the best decision in most cases. 

If you have more money to invest, age or retirement status may not be a significant concern to you. 

Time Horizon

The length of time you plan to invest in assets is your time horizon. As a younger person, you can invest in riskier investments. 

As you age, your time horizon is shorter. Typically, people shift their money into more stable assets like mutual funds as they get closer to retirement age. 

When you get closer to the time when you must take required minimum distributions (RMDs), investing in more mutual funds can help you protect your assets. 

Asset Category Diversification

To protect your investment portfolio by investing in more mutual funds, you must consider the funds you buy. You do not want your asset categories to overlap because you leave yourself susceptible to larger losses if a specific category doesn’t perform well.

How Many Mutual Funds You Should Hold

The number of mutual funds you need to add to your portfolio depends on your investment timeframe and several other factors. However, there are a few guidelines you can follow. 

One Fund

When you start investing, one mutual fund is a good start. It can help you to protect your investments by diversifying your portfolio. 

When you start investing in mutual funds, choosing one that covers several sectors can be a good idea.

Two Funds

As you increase your long-term investments, you will likely want to add a second mutual fund to your portfolio. Adding another highly diversified fund will help you add steady gains without taking a significant risk. 

Four Funds

You should consider adding four or more funds if you invest in specific mutual funds, like energy or automotive funds. While all mutual funds offer some diversification, if they are category or sector-specific, an economic downturn could lead to significant losses in sectors that are hit hard. 

Adding at least four funds that cover different categories will help to ensure that you have some protection. If you have industry-specific funds, you must pay careful attention to them, especially as you reach retirement age. 

Eight Funds

Advisors suggest that inventors with a robust portfolio have at least eight mutual funds. As you get closer to the time you need to take the required minimum distributions, you must protect yourself.

Pulling your money out of riskier assets and investing in more mutual funds is a good idea. You do not have to add eight mutual funds at the same time, you can set investment timelines. 

Mutual funds are assets that people typically hold on to for years. So, you can set timeframes for riskier assets that you have been holding. When that time is met, you sell the high-risk stocks and buy mutual funds. 

Mutual Fund FAQs

Even with all the information, deciding how many mutual funds you need can still be confusing. Read the answers to the most frequently asked questions about mutual fund investing to learn what other investors want to know. 

What are the Main Types of Mutual Funds?

The four types of mutual funds are money market, bond, stock, and target date. Money market accounts invest in short-term, low-risk debt securities. Bond funds invest in treasury bonds, and they offer fixed income. 

Stock mutual funds invest in riskier stocks than other types depending on the sectors they cover. Target date funds invest more heavily in riskier assets that may come with higher returns initially. As the fund reaches the target date, the fund assets shift to less risky investments.  

How Long Should You Hold Mutual Funds?

Each investor is different. However, mutual funds are usually held by investors for more extended periods. They are safer than investing in individual stocks and traditionally held in retirement portfolios. 

You should plan to invest in funds for at least eight to ten years or longer. However, you may want to hold them longer if they perform well. 

How Many Mutual Funds Will You Add to Your Portfolio?

Investments are personal. Each person has different goals. The balance in your investment accounts, time horizon, and risk threshold all impact you. So, carefully consider your situation and pay attention to the market. 

Diversifying your portfolio will help to protect you from planned economic shifts during reflation and unexpected downturns. However, it is not a replacement for being vigilant with your investments. As your goals and investment timeframes change, shifting assets into low-risk mutual funds can help you avert risk.