This thesis examines the optimal number and type of mutual funds that retail investors should include alongside a global index fund to effectively balance portfolio risk and return. Utilizing Monte Carlo simulations based on historical return data from 94 mutual funds over a 10-year period, the study evaluates various portfolio configurations comprising passive, active, and global index funds.

The results indicate that adding additional funds to a portfolio containing a global index fund reduces several risk measures-namely, terminal wealth standard deviation, time-series standard deviation, mean shortfall, and semivariance. The most substantial diversification benefits are observed with the inclusion of 4 to 6 mutual funds. However, returns generally diminish beyond this threshold, reflecting the classic risk-return trade-off. Portfolios, which are composed of a single global index fund or a combination of a global index fund with one additional passive or active fund, generate the highest returns over both 5- and 10-year investment horizons. Moreover, portfolios incorporating passive or mixed strategies consistently outperform those consisting solely of actively managed funds.

These findings highlight the importance of strategic fund selection, accounting for both performance and fees, and offer practical insight for retail investors aiming to optimize short and medium-term investment outcomes.