How many funds belong in your portfolio?

Adding more funds may spread your money across a wider range of investments, but that does not mean there is no upper limit.

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Investors often call diversification the only free lunch in investing. Funds make it one of the easiest ways to spread risk.

An investment fund already spreads your money across multiple stocks. But does adding more funds improve diversification and returns indefinitely, or does holding too many eventually stop making sense?

"Building a diversified portfolio helps protect you through changing market conditions," said Clare Francis, savings and investments director at Barclays Private Bank and Wealth Management. "That means investing across countries and sectors, while balancing shares with bonds."

"They spread their money across bonds, shares, and cash worldwide," she explained. "The main difference between the funds is how much risk they take. Choose the one that matches your comfort level."

But in some cases, owning several funds or investment trusts can be a sensible choice. What might you gain from doing so, and how many funds should you actually hold?

Why might you want to hold more funds?

Beginners may prefer to start with a small number of funds, then broaden their holdings as they gain experience.

"Many investors begin with a ready-made fund," Francis said. "As their confidence grows, they may add other funds or buy shares in individual companies. Anyone who prefers to build a portfolio from scratch can spread their money across separate funds covering markets such as the UK, US, Europe, Asia and emerging economies."

Some funds suit new investors better than others. If you're unsure, start with a simple option; adding a fund you don't understand rarely helps when ready-made choices can handle much of the decision-making for you.

As your confidence grows, you may add money to your portfolio to target particular sectors or investment themes.

Dzmitry Lipski, head of funds research at the investing platform Interactive Investor, said investors who want to construct a diversified portfolio themselves may need only about 10 carefully chosen funds to spread their holdings across asset classes, regions, company sizes and investment styles.

The disadvantages of holding more funds

A larger number of funds does not automatically make a portfolio more diversified. It can make things harder to track, too, especially when several funds own many of the same investments. "Investors may end up with overlapping holdings without realising it, adding complexity without meaningfully improving diversification," said Barclays Francis.

In reality, the more money you have, the smaller each individual amount will contribute to your total returns.

"If you own more than 20 funds, review each one carefully. Does it have a clear purpose, and does it add something distinct to the portfolio?" said iis Lipski. "Once the number climbs too high, the portfolio becomes harder to monitor and rebalance."

As the number of funds you own grows, some will probably overlap by investing in the same stocks or assets. After a point, adding funds does little to spread your risk further.

"Investors should look beyond the number of funds they own," Lipski said. "The real question is what each holding contributes and whether it brings anything distinct."

Does your portfolio size affect how many funds you should own?

Not really. The number of funds need not change just because the portfolio is larger or smaller. Since allocations are usually set as percentages of the total, your risk tolerance and the mix of sectors and asset classes you choose matter far more.

"Portfolio size matters less than how assets are divided and what each fund is meant to do," Lipski said. "A larger portfolio does not automatically call for more funds. Even with a modest portfolio, an investor can spread risk broadly through a single multi-asset fund. Those who want tighter control over their asset mix may prefer to hold several funds."

"Once a fund falls below roughly 2% of the portfolio, ask what it really contributes," he said. "A small specialist position may have a clear purpose, but a holding that tiny can add complexity without significantly affecting returns or risk."