You might argue that one can never get enough diversification, and that, one should diversify not just in one asset class, or within that asset class, but in one's fund managers too. But owning 20 funds might not just be 20 times better than owning a single one. Over extended periods of time, many funds are likely to perform similarly and hence, end up overlapping than complementing one another. And you might end up as the guy who wears trousers with an elasticwaistband plus a belt and suspenders.

This is especially true of the Indian markets, where there is a lack of depth in both the equity and the debt segments. A cursory look at the top holdings of most of the Unit Trust of India's equity schemes reveals that there is more overlap than diversification if you invest in more than one of its schemes. In fact, the bull run of 1993-94 and the market behaviour over the past three years give credence to the remark that when one fund goes way up, they all go way up and when one goes down, they all go way down.

Very few funds can consistently give returns in good times and bad. The tracking job involved is, in itself, is enough for you to avoid the scattershot investing strategy. So, then, how many mutual funds should you have in your portfolio?

In order to be well diversified, your mutual fund portfolio should be invested in equity funds and/or debt funds. For the investor who has just started out and wants something reasonably conservative, or for someone whocan afford only one fund, a balanced fund with an exposure in fifty different stocks and bonds should achieve enough diversification.

In the case of equity funds, for investors with more financial leverage, the ideal number of funds would depend on their investments goals, risk profile and the time horizon. Ideally a value oriented large cap fund, an aggressive mid-small cap growth fund, and an income fund should suffice for most investors with sufficient earning life. This takes the number of equity funds to three. You could also consider adding a dark horse. This could be a closed-end fund trading at a huge discount, or even a sectoral fund which could result in a substantial improvement in your returns.

For your income requirement, one or at the most two bond funds in your portfolio may make sense, but it is difficult to imagine the value of more than two bond funds of the recent genre i.e. open-end income funds. The count ignores the guaranteed return funds of UTI and LIC which are more comparablewith a bank's fixed deposit, though structured as a fund.

Of-course, if you are in the top tax bracket and have a mutual fund bent, with the current options, it is extremely difficult to contain the number of ELSSs in your portfolio. The one way to do it is the pension scheme, but than your money is locked for a life time. Thus ideally your portfolio should not have more than four-five funds. Of course, that is not counting the tax saving funds. Taking the time to create an efficient and organised fund portfolio may prove to be your key investment.