🔹 How Many Stocks Should You Hold : Introduction
As an investor you have gained enough knowledge of the stock market and want to invest in stocks directly, but still confused about how many stocks should you hold in your portfolio.
Actually, there is no specific number of stocks for portfolio diversification. Portfolio diversification mainly depends on the investment capital. Apart from that, it also depends on your risk-taking capability, investment style, and financial goals, etc. Regardless of your investment style, you should keep a portion of your money in the stock market and that’s why you should learn why you should invest some portion of income into the stock market.
The portfolio should definitely be well diversified, but it should be kept in mind that a very small number of stocks in the portfolio, while generating high returns, also increases the risk factor, whereas an excessive number of stocks (although be it the stock market or mutual funds, Security and Exchange Board of India (SEBI) governs both), along with the risk factor, also reduces the returns.
Here we will discuss the factors that will help you diversify your portfolio.
🔹 1. What does Portfolio Diversification Mean?
- Through portfolio diversifications, investments are made in many stocks or sectors instead of just one stock.
- Diversification is the process of balancing risk factors by investing in many stocks. If some companies in the portfolio do not perform, the losses will be made up by other companies that are performing well.
- Diversification also indicates that the entire portfolio is not specific to any particular stock or sector.
But it should be kept in mind that a very small number of stocks in the portfolio, while generating high returns, also increases the risk factor, while an excessive number of stocks, along with the risk factor, also reduces the returns. In this regard you can learn 5 smart ways to allocate your money (portfolio strategy for beginners).
🔹 2. How Many Stocks Should You Hold : The Ideal Number of Stocks Should Be Kept
If you confused about how many stocks should you hold in the portfolio, then it can be said that there is no fixed or specific number of stocks for portfolio diversification. Portfolio diversification mainly depends on the investment capital.
- Portfolio diversifications should be as the investment amount. Just as it is not appropriate to keep too little stock, it is also not suitable to keep excess stock.
- This ensures the ideally best portfolio diversification.
- Typically you should keep the quality stocks in your portfolio.
👉 lets take an example: In a portfolio of 1 lakh, 5-6 stocks are sufficient; similarly, in a portfolio of 10 lakh, 20-25 stocks are sufficient.
🔹 3. How Many Stocks Should You Hold : Factors on Which the Number of Stocks Depends
When you think about how many stocks should you hold in your portfolio, then you must consider the factors on which the number of stocks depends. Diversification primarily depends on the investment capital. Apart from that, it also depends on other factors like risk-taking capability, and time horizon, etc.
- 1. Capital amount: –
Number of stocks depends on the capital invested, like if you invested ₹1 lakh, then you should not keep more than 5-6 stocks.
- 2. Risk taking ability:-
In this regard, you should first determine whether you are a defensive investor or an aggressive investor and thus you should know about defensive vs aggressive investors in India: 5 key differences.
👉 If you are an aggressive investor and assume you invested ₹5 lakh, then you can keep 5–6 stocks, as your risk-taking ability is high.
👉 If you are a defensive investor and assume you invested ₹5 lakh, then you should keep 25–30 stocks, as your risk-taking ability is low.
- 3. Investment time horizon:-
👉 If you are a long-term investor, you can hold a small number of stocks if you want, since you have a lot of time.
👉 On the other hand, if you are a short-term investor, you should invest in as many stocks as possible to diversify your risk.
👉 lets take an example: if you are in your 20s and invested ₹1 lakh, then you can diversify with 2–3 stocks, and if you are in your 40s, then you should diversify with 6–7 stocks.
🔹 4. How Many Stocks Should You Hold : Sectors specific Diversification
As for diversification, you should not only invest in a specific number of stocks, but also diversify according to sectors. So,
- You need to invest across sectors, not just in a specific number of stocks.
- Your investment should be across different sectors like defense, rail, pharma, IT, FMCG, etc.
- This reduces the sector rotational risk factor.
👉 Let’s take an example: For example, railway shares perform well for a period of time, then the performance of that sector is not that good, but then the defense sector performs well.
🔹 How Many Stocks Should You Hold : Conclusion
So, from the above discussion, we have understood how many stocks should you hold in your portfolio.
We learned the crucial factors on which portfolio diversification depends. All investors should follow these factors and maintain proper portfolio diversification to reduce risk. Along with this, you should also understand the ideal time to buy or sell a stock and for this you can study about the 6 best times to sell stocks in India (most investors make this mistake) and 6 best time to buy stocks in India (most investors make this mistake).
But we also need to keep in mind that while trying to reduce risk, we should not over-diversify the portfolio in any way.
Along with that, we need to understand how many stocks we have in our portfolio that are considered over diversified. Actually, it depends on your investment amount,
👉 If you invest ₹1 lakh, then above 5-6 stocks considered as over diversifications or if your investment amount is ₹10 lakh, then above 20-25 stocks considered as over diversifications.
Finally, keep in mind that for balancing risk and you should also know about 8 smart ways to protect your investments in a market crash, you need to focus equally on quality as well as quantity.
❓ Frequently Asked Questions (FAQ)
Q1. Should portfolio diversification be done by sector or just by the number of shares?
➡ Actually you need to follow the both, by the sectors and also by the no of shares. In this way you can avoid the sector rotational risk also.
Q2. How many stocks in a portfolio will be considered over diversification?
➡ Depending on your investment amount — for example, if you invest ₹1 lakh, then more than 5–6 stocks are considered over-diversification, and if your investment amount is ₹10 lakh, then more than 20–25 stocks are considered over-diversification.
Q3. Does having too many stocks in a portfolio reduce returns?
➡ Yes, although it also helps you manage and reduce the risk factor. If some companies in the portfolio do not perform, the losses will be made up by others that are performing well.
Q4. How many stocks should you hold in your portfolio?
➡ Depending on your investment, in a portfolio of ₹1 lakh, 5–6 stocks are sufficient; similarly, in a portfolio of ₹10 lakh, 20–25 stocks are sufficient.
Q5. How many stocks can I have in my portfolio as a beginner?
➡ If you invest ₹1 lakh as a beginner, then ideally you should have 5–6 stocks in your portfolio. It depends on your capital.