New Delhi, Sept. 14 -- Investors often assume that spreading their money across different mutual fund categories automatically creates a diversified portfolio. A combination of one flexi-cap, one mid-cap and one small-cap fund may appear to offer exposure across companies of different sizes. However, experts say the number and labels of funds are less important than what the schemes actually hold.

A flexi-cap fund itself can invest across large-, mid- and small-cap stocks. Therefore, adding separate mid-cap and small-cap funds may increase exposure to those segments without necessarily providing an equivalent increase in diversification.

"Three funds can be enough, but simply combining three categories does not guarantee diversification...