How many funds do you need?
Fewer than you think.
One broad equity fund already holds 40 to 60 companies. Two such funds in the same category typically hold largely the same companies, so the second adds cost and complexity rather than diversification.
A workable structure for most people is a small number of funds covering distinct roles — a broad equity core, perhaps a separate allocation if you deliberately want mid or small cap exposure, and a debt or liquid allocation for money needed within a few years. What matters is that each fund has a reason that the others do not already serve.
Choosing between funds in a category
In rough order of how reliable each factor is:
- Cost. Known in advance, certain, and compounds for decades.
- Mandate fit. Does the category match the job you need done and the time you have?
- Consistency. Long-period rolling returns against the benchmark TRI, not a single headline number.
- Manager and process stability. Has the approach and the team been steady?
- Size, in the categories where it constrains — mid and small cap especially.
- Recent performance. Last, and least reliable. Category leadership rotates, and last year's top fund is frequently not next year's.
Tax on mutual funds
Equity funds — schemes holding more than 65% in equity, including ELSS and aggressive hybrid funds:
- Held under 12 months → short-term capital gains, taxed at 20%
- Held 12 months or more → long-term capital gains, taxed at 12.5% on gains above ₹1.25 lakh in a financial year, aggregated across all your equity redemptions
Debt-oriented funds — from AY 2026-27, the special slab-rate treatment under the specified-mutual-fund rules primarily applies to funds investing more than 65% in debt and money-market instruments (liquid, overnight, gilt, corporate bond and similar schemes), and to qualifying funds of such funds:
- Gains are added to your income and taxed at your slab rate, regardless of holding period, for units acquired on or after 1 April 2023. Indexation benefit was removed.
Other non-equity funds — hybrids below 65% equity, gold funds, international funds and the like — are not automatically covered by that rule. Their capital-gains treatment and holding period depend on the type of fund or unit and, where relevant, whether it is listed. Check the current rule for the specific scheme rather than assuming either treatment.
IDCW payouts — taxed at your slab rate as income, with TDS deducted where distributions from a scheme exceed the prescribed threshold in a financial year.
Two practical consequences:
A switch is a redemption. Moving between schemes triggers tax as if you sold. "Rebalancing" has a tax cost.
The ₹1.25 lakh exemption is annual and is easy to waste. Gains left unrealised do not carry the exemption forward.
Ten mistakes that actually cost money
1. Chasing last year's winner. Covered above. The most common and most expensive habit.
2. Stopping a SIP when markets fall. This is when the method works. Stopping converts a mechanical advantage into a loss.
3. Holding a regular plan while receiving no advice. Paying for a service you are not getting, every year, forever.
4. Owning too many overlapping funds. Multiple expense ratios, one portfolio.
5. Choosing a fund because its NAV is low. NAV level is meaningless. This still persuades people every day.
6. Choosing IDCW for "regular income". It returns your own capital and is taxed at slab rate. An SWP does the same job better.
7. Judging an equity fund over one year. Equity funds are tools for periods of several years. A one-year comparison mostly measures market conditions.
8. Ignoring the asset allocation question. Which categories you hold, and in what proportion, matters more than which specific fund you picked within a category.
9. Investing money you will need soon in equity. Money needed within two or three years does not belong in an equity fund, regardless of how good the fund is.
10. Never checking the CAS. Forgotten folios, an outdated bank account, a missing nominee, a regular plan you did not realise you held. One email, twice a year.
The uncomfortable summary
Most of what determines your outcome is not fund selection. It is: how much you invest, for how long, in which asset category, at what cost, and whether you stay invested when it falls.
Fund selection is the part that receives the most attention and the part that matters least.
Key takeaways
- Before adding a fund, be able to say what it holds that your existing funds do not.
- Cost is the most reliable selection factor; recent performance is the least.
- Equity funds: 20% short-term, 12.5% long-term above ₹1.25 lakh a year — verify current rates.
- Debt fund gains are taxed at your slab rate regardless of holding period for units bought from 1 April 2023.
- Amount, duration, asset allocation, cost and behaviour matter far more than which fund you picked.
Check your understanding
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