Charles Schwab & Co., which invented the mutual fund supermarket with thousands of portfolio choices, is now warning investors about "overload."

A study from the San Francisco broker-dealer has concluded that many retail investors should simplify their holdings. It said investors generally should not own more than 10 actively managed mutual funds-three diversified equity funds in each of three major categories plus a diversified bond fund.

Some retail investors tend to buy too many portfolios pursuing similar strategies, said Mark W. Riepe, a Schwab vice president and author of the report. The portfolio of an investor who duplicates efforts this way essentially "becomes an index fund," Mr. Riepe said.

For those lacking time and investment know-how, the best approach might be to buy an index fund. Index investors should hold one broadly diversified index fund per asset class, Mr. Riepe said.

Though index funds might have lost some appeal among investors, given the recent market correction, they "have performed quite well in a lot of bear markets," he said.

Begun in May, the study analyzed three main equity classes: large-cap, small-cap, and international. Using hypothetical portfolios containing one to 10 randomly selected funds per asset class, the study examined three factors: average return over 36 months, risk, and the degree to which each fund deviated from a benchmark.

Mr. Riepe said the study was prompted by Schwab brokers who passed on concerns raised by customers.

However, some observers expressed skepticism about Schwab's approach. "It's an oversimplification in my mind," said Robert L. Ash, a managing director at Fleet Financial Group's investments unit in Boston. He said it is ironic that "the company with the plethora of choice is now saying, 'Wait a second.'"

Even at its most limited, Schwab's OneSource mart offers retail investors 800 no-load, no-transaction-fee funds. Mr. Ash said that most broker-dealers favor a "preferred-list" approach, which offers more choice. Fleet brokers offer a list of 25 third-party funds and "tailor" their advice according to the investor's needs, he said.

Harold Evensky, a financial planner based in Coral Gables, Fla., said it is "humorous" that the architect of choice is advocating limits for customers. However, it's "probably good advice for the average retail investor," he conceded.

Said Mr. Riepe: "You don't need a supermarket to make things complicated for yourself." The report will be sent out to customers over the next few weeks, he said.

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