Before we discuss how many stocks one should own for a diversified portfolio let us understand more about the diversified portfolio.

What is a Diversified Portfolio?

When an investor builds a portfolio comprising of different stocks from different industries or sectors it is called a diversified portfolio. Such types of portfolios are generated to keep minimal risks and avoid an overall impact on the portfolio. If you have a diversified portfolio a poor performing stock will not affect your overall returns. However, along with a diversified portfolio, it is important to remember like under diversification over diversification isn’t advisable either.

Importance of Diversified Portfolio

Let us understand why it is important to have a diversified portfolio. For instance, if you have your portfolio comprised of stocks belonging to only one organization. If those stocks fail to perform you can notice a significant drop in the value of your portfolio. However, along with these poorly performed stocks if you buy stocks performing well then only a small portion of  your portfolio will be affected. So it is recommended that you build a portfolio across different companies or even different sectors. Like under diversification you also need to avoid over diversification of the portfolio. For instance, if your portfolio is under diversified your entire portfolio is dependent on one type of stock. So the poor performance of that one single stock can impact your entire portfolio. Whereas over diversification yields lower returns and good performance of a single stock does not make much difference.

To sum up it means more stocks lessen the risk and also overall profit. Similarly lesser the number of stocks greater is the risk and also the profit.

So the question comes how many stocks should be in a portfolio?

• The minimum number of stocks should be in a portfolio

The minimum number of stocks one should have in their portfolio is three.

• The maximum number of stocks should be in a portfolio

Similarly, the maximum number of stocks should be 20. If the number goes above you the maximum the risk factor decreases however the profit will also decrease. This is because only one good performing stock will have minimal impact on the portfolio.

However, the ideal number of stocks varies from investor to investor. The following are a few factors you need to consider when you decide the ideal number for yourself. You can also depend on these factors and use them as guidelines while selecting your preferred number of stocks.

Factors that will help you decide how many stocks in portfolio you should have?

• Risk parameter

You should identify your risk appetite basis that you can select your preferred organization, sector, or industry. If you have lesser stocks that underperform then the impact on your portfolio is minimal. Hence when you know the risk appetite you can decide between different stocks like value stocks, growth stocks, or traditional large-cap stocks.

• Expected returns

The returns are inversely proportionate to the number of your stocks. If the number of stocks is higher the returns yielded will be lower. Some of the stocks always yield better returns and some of them give average returns. So if you expect higher returns you should not focus much on diversification.

• Period of investment

It is always recommended that to yield better returns one should invest in the Indian stock market for the long term. Some stocks perform and give the highest returns overnight but these types of stocks do not sustain. Also, the longer period of investment maximizes the returns even without diversification of your portfolio. So it is advisable to go for a healthy long term stock market investment plans which assure stability and decent returns.

• Management

You should scrutinize the management of the organization for more clarity on their growth potential. If the management is focused and growth-oriented you can buy stocks to maximize returns. So research about the company before you buy their stocks and create a portfolio that yields good returns. You can have confidence in the stocks you invest in after you are thorough with the growth propositions of the company.

• Fundamentals of the organization

You need to analyze the rudimentary aspects like revenue, annual performance, cash flow, etc. Determine the efficiency of the organization which will eventually impact the performance of your portfolio.

Apart from general notions, you can use the above factors to determine the ideal number of stocks which will suffice your diversified portfolio. These factors will also solve the puzzle of the ideal number of stocks in the portfolio.