Diversifying Your Investments: Multiple Fund Families?

There are several factors to consider when deciding whether to hold investments in multiple fund families. Firstly, investing in multiple fund families can provide the benefit of diversification, reducing the risk associated with having all assets in one fund firm. However, over-diversification can also be detrimental, diluting potential gains. Another advantage of investing in multiple fund families is the access to a broader range of investment options, allowing for a more comprehensive portfolio. Additionally, fund families often offer benefits such as lower costs, sales charges, and access to research and investment advice. On the other hand, investing in a single fund family can provide simplicity and potentially lower expenses due to consolidated management-related expenses. Ultimately, the decision depends on factors such as investment goals, risk appetite, and the level of diversification desired.

Advantages of investing in multiple fund families

Investing in multiple fund families can have several advantages for investors. Here are some benefits to consider:

Diversification

One of the key advantages of investing in multiple fund families is diversification. By spreading investments across different fund families, investors can reduce the risk associated with having all their assets in one fund firm or following a single house investment style. With multiple fund families, investors gain exposure to different investment strategies and asset classes within each family. This diversification can help balance out performance, as some investments will do well while others might not, thus mitigating potential losses.

Access to a Wide Range of Investment Options

Different fund families offer distinct advantages and investment opportunities. By investing in multiple fund families, individuals can access a broader range of investment options and strategies. This allows investors to tailor their portfolios to their specific goals, risk tolerance, and preferences.

Benefits of "One-Stop Shopping"

Investing in multiple funds within a single fund family can provide benefits such as "one-stop shopping." Investors may find it more convenient and efficient to have all their investments in one place, with consolidated fund investment reports and the ability to make fund exchanges with minimal or no fees. Some fund families also offer additional benefits, such as discounts, to investors who show brand loyalty.

Access to Research and Information

Fund families often provide valuable resources to their investors, such as investment research, news on current events, alerts about new products, and investment advice. By investing in multiple fund families, individuals can gain access to a broader range of information and insights, helping them stay informed about personal finance and investment opportunities.

Reduced Costs and Charges

Investing in multiple funds within a single fund family can lead to lower costs and sales charges. Fund families may offer reduced fees or waive certain expenses for investors who hold a diverse range of funds within their company. This can result in significant cost savings for the investor.

In summary, investing in multiple fund families can provide benefits such as diversification, access to a wider range of investment options, convenience, reduced costs, and valuable information resources. However, it is important to note that there is no one-size-fits-all approach, and the ideal number of fund families to invest in will depend on various factors, including individual investment goals, risk appetite, and the level of comfort in monitoring multiple funds.

Disadvantages of investing in multiple fund families

While investing in multiple fund families can provide diversification and a broader range of investment options, there are some disadvantages to consider:

• Limited diversification: Investing in a single fund family can provide a diverse range of investment options, and smaller fund families may hold similar stocks across different funds. Therefore, investing in multiple fund families may not always provide greater diversification.
• Quick decisions: It is easy to assume that if one fund in a family performs well, its sibling funds will also do well. This assumption may lead to hasty investment decisions that are not thoroughly researched.
• Higher costs: Investing in multiple fund families may result in higher costs, as there may be additional fees, sales charges, or commissions associated with each family.
• Complexity and management: Investing in multiple fund families can increase the complexity of managing your investments. Different fund families may have distinct processes, platforms, and requirements, making it more challenging to monitor and manage your portfolio.
• Reduced benefits: Some fund families offer incentives and benefits for investors who show brand loyalty. By diversifying across multiple fund families, you may miss out on these benefits, such as discounts, lower fees, or access to exclusive investment opportunities.
• Diluted expertise: Each fund family has its own investment style, expertise, and specialisation. By spreading your investments across multiple fund families, you may not fully benefit from the unique strengths and insights of a particular family.

What is a family of funds?

A family of funds is a group of funds that are managed by a single investment company. These funds are offered to investors to cater to their different investment needs. For example, some investors might seek mutual funds that take a more growth-oriented approach, while others might prefer funds that are more conservative and low-risk.

A family of funds provides a range of investment options, from open-end exchange-traded funds to open-end mutual funds. These funds are comprehensive and constitute a family of funds. The management investment companies that offer these funds are registered with the Securities and Exchange Commission (SEC) and are regulated by the United States.

Investing in a family of funds can offer benefits such as lower costs and sales charges, as well as access to research and investment advice. It also provides a "one-stop shop" for investors, making it easier for them to manage their investments. Additionally, some fund families offer discounts or other benefits to investors who show brand loyalty and invest across several of the company's funds.

However, it is important to note that investing in a single family of funds may have its drawbacks. One of the primary concerns is losing diversification due to a house investment style. If all your assets are with one fund firm, there is a risk that your investments may not be as diversified as you think. This is because different funds within the same family may end up investing in similar stocks or following similar strategies. Therefore, it is important for investors to carefully consider their options and conduct thorough research before deciding to invest in a family of funds.

How many mutual funds should I own?

There is no one-size-fits-all answer to the question of how many mutual funds an individual should own. The ideal number depends on several factors, including the level of expertise, risk appetite, and investment goals.

Benefits of Multiple Mutual Funds

Diversification is a common strategy to spread risk. By investing in multiple mutual funds, you can gain exposure to a wider range of industries and sectors, reducing the impact of a single company's or industry's performance on your portfolio. This strategy can be particularly beneficial if you have a good understanding of various sectors.

Additionally, investing in multiple fund families can provide access to different investment styles and strategies. For example, some funds may focus on large-cap companies, while others may invest in mid-cap or small-cap companies, each presenting different levels of risk and return potential.

Potential Drawbacks of Multiple Mutual Funds

However, it is possible to over-diversify, diluting the potential gains from your investments. Each additional fund increases costs through expense ratios, and having too many funds can reduce their individual impact on your portfolio's performance.

Moreover, if your funds have significant overlap in their holdings, you may not be as diversified as you think. It is important to review the underlying holdings of your funds to ensure they complement each other and do not duplicate investments.

Suggested Number of Mutual Funds

While there is no magic number, a rule of thumb suggested by some sources is to own around eight mutual funds, with a range of +/- 2 depending on your specific circumstances. Here is a breakdown by fund type:

• Large-cap mutual funds: Up to 2 or 3. Beyond that, there will likely be significant overlap in the shares owned.
• Mid-cap mutual funds: Up to 2, considering the higher risk and potential for higher returns.
• Small-cap mutual funds: Up to 2, as these are very risky and volatile.
• Debt funds: Ideally 1, but 2 is also acceptable. Debt funds tend to provide similar returns, so owning multiple funds may not offer additional benefits.
• Sectoral mutual funds: Invest in as many sectors as you have good knowledge about. Avoid investing in sectors you are unfamiliar with.

What are the risks of investing with one fund family?

Section title: What are the risks of investing with one fund family?

When you invest in a fund, a fund manager will invest in whatever is appropriate according to the aims of the fund. Typically, fund houses will have a team of analysts to help guide these investment decisions. However, if you invest with one fund family, you may lose diversification due to a house investment style. For example, if you are at a firm that is heavily focused on buying biotech stocks, your diversification won't be as good as you thought it was, and you could suffer losses across the board.

Additionally, if all your funds are actively managed funds with the same firm, and a lot of people are leaving, the quality of your investments could slowly erode. Even if the fund company is large, like Fidelity or T. Rowe Price, where different investment styles are practiced, there is still a risk that growth managers could favour similar stocks.

Another risk of investing with one fund family is that you may end up over-diversifying. While it's important to have a mix of styles and strategies to achieve diversification, that doesn't mean you need a long list of funds. Over-diversifying can prevent you from making good gains.

Furthermore, having too many funds can be expensive. This is because having too many funds negates the impact that any single fund can have on performance, while the expense ratios of multiple funds can add up to a number that is greater than average. As a result, expense ratios rise while performance is often mediocre.

Therefore, it's important to consider your investment objectives and risk appetite when deciding how many funds to invest in. While there is no one-size-fits-all answer, it's generally recommended to hold a mix of styles and strategies to achieve diversification without overdoing it.

Frequently asked questions