How many funds should I own in my stocks and shares ISA?

A common question I’ve been asked over the years is how many funds to invest in. I’m sure this is something many ISA investors will be pondering in the run-up to tax year end.

However, in common with other investment-related questions, there’s no magic number of funds that investors should aim for.

• Invest with ii: Open a Stocks & Shares ISA | ISA Investment Ideas | Transfer a Stocks & Shares ISA

Instead, how much you have to invest is one factor. If you’re making your first foray into the stock market and have £1,000 to invest, then one fund makes sense. You could buy a one-stop shop multi-asset fund to obtain instant diversification, as such funds buy both shares and bonds.

For larger pot sizes, and as your portfolio (hopefully) grows, you can create your own diversified portfolio by selecting funds investing in different asset classes, regions, and  company sizes. There’s also different investment styles to consider, such as growth and value. 

However, avoid buying too many funds or investment trusts. If you treat funds like sweets and have too many, you risk ending up doing more damage than good through over-diversifying and unwittingly replicating the market. This is known as “diworsification”.

For example, if you own half a dozen or more active UK funds attempting to beat the market, you could potentially end up owning hundreds of different companies. That makes it harder to beat the stock market because your portfolio ends up looking like it.

If you want to invest in hundreds of UK shares, this can be done much more cheaply through a passive fund – either an index tracker or exchange-traded fund (ETF). So, it’s important to ensure that each fund is bringing something unique to the party in terms of how it invests and what it’s investing in.

Those who own a couple of active funds that invest in the same region and have the same investment style, could consider doing some pruning.

• Active or passive: the ultimate guide to investing your ISA
• What are the cheapest ways to track global markets?

A quick way to check for overlap is to look at the respective top 10 holdings and sector weightings. When it comes to global funds, study the country weightings too. A large amount of overlap could indicate that the funds are too similar.

Also examine performance. If a performance line chart looks similar over different time periods, this could indicate that the funds are not providing sufficiently different exposure.

It also makes sense to diversify by fund firm, as some follow a particular investment style that could go out of fashion. Baillie Gifford, for example, has a growth-focused approach to investing.

For those who prefer to own passive funds, it’s important to look under the bonnet and understand what you are investing in. For example, some global index funds and ETFs only provide exposure to developed markets, whereas others include emerging markets.

Some index funds and ETFs investing in a certain region or sector track the up and down fortunes of the same index, such as the MSCI World Index. Therefore, owning more than one index fund or ETF tracking that index will be doubling up on the same exposure.

Something else that investors need to weigh up is how much time they have. The more funds you buy, the harder it is to keep on top of how they are performing and whether changes need to be made. Things to check a couple of times a year include whether the fund manager and strategy is the same as when you first bought the fund or trust.  

A fund manager change – particularly if there’s evidence of longstanding succession planning – is not necessarily a reason to sell. But if a fund is no longer doing what you want it to do, it’s probably time to hit the sell button. For example, if you bought it for income purposes and it’s no longer paying dividends.

Another problem with having too many funds is that you can end up with a large tail of small holdings that – even if they perform well – won’t add much value to your overall returns.

Funds that are only a couple of per cent of your overall portfolio are worth addressing. Ask yourself why you picked them and whether they are fulfilling their role in your portfolio. Consider whether you would buy more of a fund, so it could become a more meaningful position. Alternatively, if you have lost faith in the fund, it could be time to move on.

• 10 funds to generate £10,000 of income in 2025
• Nine investment trusts to generate £10,000 of income in 2025

For me, it makes sense to invest in a manageable number of different funds to reduce risk, while avoiding diversifying too much. If you have more than 20 funds, it would be a good idea to review them and ensure each one is pulling its weight in terms of performance, and that they are sufficiently different.

For those dipping their toe into the stock market for the first time, as mentioned above, a multi-asset fund is a sensible starting point. Such funds give your money ample opportunity to grow, while also guarding against severe short-term losses.

At interactive investor, we have our Managed ISA, which is a range of 10 portfolios that cater to different risk levels and offer the option of investing sustainably. Each portfolio holds between 10-20 funds. 

There’s also our Quick-start range, aimed at beginner investors. This range endorses six multi-asset funds. Three are actively managed by Royal London and the other three are passively managed low-cost funds from Vanguard that follow the performance of the market.