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How Many Funds Do You Need?

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 market risk.

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 securities.

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.

Content is provided by Wealth Management Systems Inc. as a service to Wells Fargo. Copyright © 2019, Wealth Management Systems Inc. All rights reserved.