Consider this. You have received your year-end performance incentive, which you want to invest in equity mutual funds. You have to choose from among 20 peer funds. Considering that you are likely to buy 3-4 funds, would you feel happy having so many choices?

We typically believe that choice is good. Logically then, choice of 20 funds ought to be better than some. But psychologically speaking, your satisfaction is likely to be reduced with more choices. Why? Suppose you are invited to a dinner party. Your host offers a large spread of appetisers, main-course and dessert. You find many of your favourite dishes among them. But you are unlikely to eat all that is available. The fact is that you have a small stomach to fill and more dishes on offer. This means you will have to decide on the dishes to taste and the ones to leave untouched.

While you may feel happy with the dishes you choose, the fact is that the ones that you did not taste could have been better! The dissatisfaction from knowing that the ones you have not tasted could have been better is likely to subtract the satisfaction you get from the ones you tasted. You will most likely leave the party dissatisfied because your host overwhelmed you with too many choices.

The same is true with investments. At the extreme, too many choices could prompt the investor to take no decision due to the regret one may face if the products one did not choose perform better. Research has shown that people sometimes pass off their contributions in 401 (k) plans when employers' offer too many investment choices. This is costly because these people are missing on employer's matching contribution for their retirement. Given these issues, a choice of only 4-5 funds appears better. Besides, we can invest equally in all funds (1/n heuristic) to avoid regret. Some choice is good. But, perhaps, too many choices could leave us unsatisfied.

(The author is the founder of Navera Consulting. He can be reached at >enhancek@gmail.com )

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