When you sit down to evaluate your portfolio, do you have
trouble remembering exactly why you bought certain funds in the
first place? Do you buy funds randomly, based on recent magazine or
newspaper articles? If you answered yes to either of these
questions, you may be guilty of fund collecting. With thousands of
mutual funds available today, some people have started collecting
mutual funds as if they were art. The downside of holding too many
similar funds is potentially lower returns on your portfolio.
Why Hold More Than One Fund?
Diversification is the process of investing in different types
of funds or securities in order to reduce risk. Diversifying among
different styles and asset classes increases the chance that as one
investment is falling in value, another may be rising. A mix of
assets can help position your portfolio to better weather market
swings. Keep in mind that there is no guarantee that a diversified
portfolio will enhance overall returns or outperform a
nondiversified portfolio. Diversification does not ensure against
How Many Funds Are Right for You?
Consider investing in a minimum of three mutual funds. These
first funds might include a stock fund, a bond fund, and a money
market fund. How much you invest in each fund will depend on your
investment goals, risk tolerance, and time horizon. You might want
to consider adding a mix of different types of stock and bond funds
to further diversify your portfolio.
How Many Is Too Many?
With so many funds in the market, it is inevitable that there
are several funds with similar strategies and performance. These
funds invest in the same stocks and follow identical investment
styles. If you hold several funds that all use similar investment
strategies in your portfolio, you essentially hold the market. You
might be able to achieve the same result much more cost-effectively
by simply buying an index fund.
Fund Investment Categories
Balanced funds use a mix of stocks, bonds, and
money market securities to try to generate moderate growth and
income while carrying moderate risk.
Bond funds invest in government, Treasury, and
municipal bonds to provide revenue and reduce market risk.
Global funds invest in foreign securities
seeking to balance out single market performance risk.
Growth funds buy and sell stocks in an attempt
to generate high returns.
Index funds strive to post returns comparable
to the benchmark index for the investment category.
Money market funds seek to maintain a stable
share price and generate income by investing in high-quality bonds,
commercial paper, and bank notes.1
Small-cap funds buy and sell stocks of smaller
companies in search of high returns.
Large-cap funds invest in larger,
well-established companies in search of high returns and a lower
degree of volatility.
Value funds seek to generate income and capital
appreciation by investing in out-of-favor or undervalued
Target-date funds invest in a mix of different
asset classes and automatically adjust the mix of invesatments to
reduce risk as you approach retirement.
1An investment in a money market fund is not insured
or guaranteed by the Federal Deposit Insurance Corporation (FDIC)
or any other government agency. Although the fund seeks to preserve
the value of your investment at $1.00 per share, it is possible to
lose money by investing in the fund.
Time to Reevaluate
An investment advisor can help you evaluate each fund you invest
in to ensure it plays a specific, defined role in your portfolio.
If you find yourself surrounded by a sea of similar funds, or can't
remember why you bought a fund in the first place, it could be time
to pare down.