|
|
|
| Home > Education and Planning > Investor Education |
|
| 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.
The Purpose of Mutual Funds
Mutual funds are pools of securities, which typically offer diversification within one or more asset classes. In general, people invest in mutual funds in order to achieve diversification in their portfolio without the trouble of managing a large number of stocks and bonds. With more than 8,000 mutual funds available today, however, some people have started collecting mutual funds as if they were art. The downside of holding too many similar funds is the potential for less diversification, which may consequently increase your risk level.
Why Hold More Than One Fund?
The number of funds that is right for you depends on your investment goals and the amount you have to invest. If you have both short- and long-term goals, you will likely want different types of mutual funds for each time frame. The more capital you have to invest, the greater your ability to afford diversification among different asset classes and investment styles.
Asset allocation is the way in which you weight investments in your portfolio. There are three main asset classes: stocks, bonds, and money markets. Each has its own characteristics in terms of value fluctuation, level of market risk, and ability to outpace inflation. Which asset classes you decide to invest in depends on how your investment time frame and goals match up with the risk and return potential of the various asset classes.
The concept of diversification - the process of investing in different types of funds or securities in order to reduce risk - is an important part of asset allocation. Diversifying among different asset classes may increase the chance that as one investment is falling in value, another may be rising. If you have a lot to invest, you can also diversify among investment styles to help reduce risk.
Active and passive investing are the two most basic investment styles. While active investors believe that managed funds have the ability to outperform the market, passive investors have faith in the long-term success of the market index. Active investors are further divided into the two categories of growth and value. Growth funds typically invest in well-established companies with strong earnings potential. Value funds, on the other hand, invest in companies that have recently fallen out of favor but have the potential to bounce back. Many investors prefer to combine investment styles in order to potentially gain through different market cycles that favor different approaches.
How Many Funds Are Right for You?
While the appropriate number of mutual funds to hold will differ from investor to investor, many financial experts and money managers suggest a portfolio should contain at least three, but probably no more than a dozen, funds.* The first funds would likely 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 and time horizon.
As your investment capital increases, you might consider adding a mix of different stock and bond funds. A long-term investor seeking growth who already holds a domestic large-cap stock fund could add a small-cap stock fund and an international stock fund without duplicating holdings. Following such a strategy of holding different types of funds, an investor with $25,000 to invest could achieve a well-diversified portfolio with just six funds.*
With so many funds on the market, it's inevitable that there are several funds with similar strategies and performance. If you hold several funds that all use similar investment strategies, you essentially hold the market. You could achieve the same result much more cost-effectively by simply buying an index fund.
Time to Reevaluate
Each fund that you invest in should play a specific, defined role in your portfolio. A financial advisor can help you evaluate each fund and the role it may play 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 your portfolio.
Points to Remember:
- People invest in mutual funds in order to achieve diversification without the time and cost of tracking hundreds of individual securities.
- Before picking a mutual fund, consider your investment goals, time frame, and the amount you have to invest.
- Diversification among different asset classes may help reduce risk and potentially increase the rate of return of your portfolio; however it does not assure a profit or protect you against loss in declining markets.
- Owning too many funds means you may be paying for active management when you really hold the market.
- Your financial advisor can help you evaluate each fund to determine its potential role in your portfolio.
Distributing Broker/Dealer: Enterprise Fund Distributors, Inc., Atlanta Financial Center, 3343 Peachtree Road, N.E., Suite 450, Atlanta, Georgia 30326-1022.
|
|
|
|
Privacy Policy 
