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How Many Funds Do You Need?

For large and small investors alike, it's easy to find yourself with a lot of different mutual funds. Whether it's through present or former 401(k) plans or IRAs, or bought on advice from your financial advisor, you may have more funds than you need. While there is no ideal number of mutual funds to own, you may be able to simplify your portfolio and even improve your average fund expense ratio by examining how your different funds compare and whether they are serving your overall investment objectives.

Before picking a mutual fund, consider your investment goals, time frame, and amount of investment capital. You should diversify among different asset classes and investment styles to help reduce risk and potentially increase the rate of return of your portfolio. The more capital you have to invest, the greater your ability to afford diversification among different asset classes and investment styles.

Consider investing in a minimum of three mutual funds, possibly including a stock fund, a bond fund, and a money market fund. How much you invest and which type of funds will depend on your investment goals, risk tolerance, and time horizon. You may wish to further diversify with more funds. Your investment advisor can help you evaluate each fund to determine its role in your portfolio.

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