Mutual Fund Pollution: Why Too Many Schemes Is Costing You Money

Last Updated on April 23, 2026 by Hemant Beniwal

A client came to me last year with a spreadsheet of his investments. He had been investing for eleven years. The spreadsheet had 23 mutual fund schemes across 7 AMCs.

When I asked him to explain the difference between his three large-cap funds, he could not. When I asked why he had both a flexicap and a multicap, he said his previous distributor had recommended both at different times. When I asked about the small-cap fund he had bought in January 2024 – right after small-caps had delivered 60% returns in 2023 – he went quiet.

This is mutual fund pollution. Not a systemic problem with mutual funds as an asset class. A behavioural problem with how retail investors accumulate schemes over time – usually through a combination of poor advice, recency bias, and the industry’s relentless output of new fund offers.

Table of Contents

• What Is Mutual Fund Pollution?
• How Investors End Up With Too Many Schemes
• What SEBI Did About It in 2017 – and What It Did Not Fix
• Signs You Have a Khichdi Portfolio
• How Many Funds Do You Actually Need?
• How to Clean Up a Polluted Portfolio
• Frequently Asked Questions

What Is Mutual Fund Pollution?

The term “mutual fund pollution” captures the problem of too much choice creating worse outcomes. India’s mutual fund industry has grown dramatically – from Rs. 14 lakh crore in AUM in 2016 to over Rs. 67 lakh crore in 2026. The number of schemes has grown alongside it.

Over 2,500 active schemes across 44+ AMCs means the average investor faces a genuinely bewildering menu. The problem is compounded by three forces working against rational portfolio construction.

First, AMCs have commercial incentives to keep launching new schemes. A new NFO generates fresh commission income, gets media coverage, and gives distributors a reason to call clients. The fund house that launches a new thematic fund just as that theme is peaking can gather significant AUM before the inevitable underperformance arrives.

Second, the recency bias is powerful in investing. Whatever delivered strong returns last year attracts money this year, even when the conditions that drove those returns no longer exist. Small-cap funds in 2024. PSU funds in 2023. International funds in 2021. Each cycle mints a new category of trend-chasing investors.

Third, most retail investors never consolidate. They add new funds but rarely remove old ones. The portfolio that started with 3 good funds in 2015 has grown to 18 schemes by 2026 with no clear strategy connecting any of them.

“Psychologists have already proven that too many choices lead to worse decisions or no decision at all. The mutual fund investor with 23 schemes is not more diversified than the one with 6 well-chosen schemes. He is more confused, more costly, and almost certainly underperforming the simpler portfolio.”

How Investors End Up With Too Many Schemes

The accumulation usually happens gradually, through predictable patterns.

Multiple advisors or distributors over time. Each relationship produces its own set of recommendations. The portfolio becomes a graveyard of advice from people who are no longer involved. The investor keeps paying expense ratios on schemes they barely remember buying.

NFO chasing. New Fund Offers are aggressively marketed, often with the incorrect claim that a Rs. 10 NAV is “cheaper” than a Rs. 100 NAV. NAV is not a price – it reflects accumulated returns on the original investment. A fund with Rs. 100 NAV that has delivered 15% CAGR is better than a new fund at Rs. 10 NAV with no track record. NFOs exist to gather assets for the AMC, not to deliver superior returns to investors.

Performance chasing. When a category delivers exceptional returns, inflows surge. By the time most retail money arrives, the easy returns have been made. The investor who bought 3 different small-cap funds in 2024 after 60% returns in 2023 now holds identical, overlapping positions bought at elevated valuations.

Theme funds for every cycle. Infrastructure, defence, consumption, digital, healthcare, green energy. Every cycle produces its own themed NFOs. An investor who bought one theme fund in each of the last five years now has concentrated, correlated bets across five different “diversified” positions.

What SEBI Did About It in 2017 – and What It Did Not Fix

In 2017, SEBI recognized the proliferation problem and introduced a comprehensive scheme categorization and rationalization framework. AMCs were required to merge or close overlapping schemes and maintain only one fund per defined category. Large-cap, mid-cap, small-cap, flexi-cap, multi-cap, value, contra – each category was precisely defined, and AMCs could offer only one scheme in each.

This helped significantly. The number of schemes dropped, category definitions became standardized, and investors could at least compare like with like. AMFI’s data on category returns became meaningful.

What SEBI’s framework did not fix: the proliferation of thematic and sectoral funds, which remain largely unregulated in terms of category limits. It also did not address hybrid and solution-oriented funds, which have continued to multiply. And it did nothing about investor behaviour – the tendency to add new schemes without consolidating old ones.

The industry’s response was creative: AMCs that could no longer launch duplicate large-cap funds launched “focused” large-cap funds, “value” large-cap funds, and “ESG” large-cap funds instead. The spirit of rationalization was partially fulfilled. The commercial incentive to keep multiplying products was not.

Signs You Have a Khichdi Portfolio

A khichdi portfolio – named for the mixed grain dish that combines everything into an undifferentiated mass – has recognizable symptoms.

You own more than 3 large-cap or index funds. You have multiple flexi-cap or multi-cap schemes from different AMCs. You have funds from every category that performed well in the last five years, but no clear strategy connecting them. You cannot explain in one sentence what role each fund plays in your portfolio. Your total SIP across 15 funds is Rs. 25,000 per month – meaning each scheme gets less than Rs. 2,000, too small to matter. You have held an NFO from 2018 that has returned 3% annualized, and you have not touched it because “it might recover.”

How Many Funds Do You Actually Need?

A well-constructed portfolio for most Indian investors needs 4 to 6 schemes, not 15 to 20. Here is a reasonable structure for a long-term equity-oriented investor:

One large-cap index fund (Nifty 50 or Sensex) as the core equity position. One flexi-cap or multi-cap fund for active mid and small-cap exposure. One mid-cap or small-cap fund if you have a 10+ year horizon and high risk tolerance. One international equity fund for geographic diversification (optional, capped at 10 to 15% of equity). One liquid fund for emergency corpus. One short-duration debt fund for medium-term goals.

That is six schemes covering the full spectrum of what most investors need. Any scheme beyond these six should justify its presence by doing something none of the six can do. If it cannot, it is pollution.

How to Clean Up a Polluted Portfolio

Portfolio consolidation requires methodical analysis, not hasty selling. A few principles to follow.

Categorize before you cut. List every scheme with its SEBI category (large-cap, mid-cap, etc.), the current value, the XIRR since purchase, and the exit load status. This gives you the full picture before making any decisions.

Identify duplicates within categories. If you have three large-cap funds, you almost certainly need at most one. If you have two flexi-cap funds, one should go. Keep the one with the better long-term track record relative to its category benchmark, better fund management consistency, and lower expense ratio.

Handle tax implications thoughtfully. Redemptions trigger capital gains tax. For equity funds held more than a year, LTCG above Rs. 1.25 lakh is taxed at 12.5%. For funds held less than a year, STCG is 20%. Do not redeem everything at once – spread redemptions across financial years to manage the tax impact. For ELSS funds, ensure the 3-year lock-in has been satisfied before redeeming.

Do not move SIPs from old schemes to new ones without reason. The most common mistake in consolidation is selling an underperforming fund to buy a recently outperforming one. That is the same recency bias that created the polluted portfolio in the first place. Only consolidate into schemes you would buy if you were starting fresh today.

For more on portfolio construction, see our article on 10 investment mistakes that cost Indian investors lakhs.

Frequently Asked Questions

How many mutual fund schemes should I have in my portfolio?
For most investors, 4 to 6 schemes across different asset classes and sub-categories is sufficient for genuine diversification. Beyond 8 to 10 schemes, each additional fund adds administrative complexity and overlapping holdings without meaningfully reducing risk. The goal is a purposeful portfolio where each scheme has a clear role, not a large collection of schemes.

Is it bad to have too many mutual funds?
Yes, for several reasons. Overlapping holdings mean you are paying multiple expense ratios for essentially the same underlying stocks. Tracking and reviewing a large portfolio is harder, leading to less active oversight. Behavioural complexity increases – more schemes means more emotional attachment to individual positions, making rational rebalancing harder. And the dilution effect means no individual holding has meaningful impact on overall performance.

Should I stop my SIPs in underperforming funds?
It depends on the reason for underperformance. If a fund has consistently underperformed its category peers over 3 to 5 years and the underperformance is structural (not just a bad recent quarter), stopping the SIP and redirecting to a better fund in the same category is reasonable. But switching between top-performing funds every 1 to 2 years based on recent performance is exactly the behaviour that destroys returns. Evaluate relative to category benchmark, not absolute returns.

Are NFOs worth investing in?
Rarely. An NFO is a new mutual fund with no track record, no existing portfolio, and a marketing budget. The Rs. 10 NAV is not a price advantage – it is just a starting point. An established fund with a 10-year track record in the same category, a consistent fund manager, and a demonstrated investment process is almost always a better choice than a new fund in the same space. The exception: if an NFO introduces a genuinely new category or investment mandate that nothing in the market covers. That is rare.

One question for you: If you applied the one-sentence test to every scheme in your portfolio today, how many would survive it?