Why You Should Declutter and Consolidate Your Mutual Fund Portfolio

November 18, 2023 Mutual Fund

Mutual funds have turned out to be a popular choice for wealth creation, reveals the inflows and folio data released by AMFI.

Individual investors — both retail and High Net Worth Individuals HNIs — now hold a dominant share of the industry asset, thanks to the Mutual Funds Sahi Hai campaign.

However, what I observe is, that investors in the endeavour to lap up the best or top mutual funds or by opting for New Fund Offers (NFOs) are ending up over-crowding the mutual fund portfolio.

At PersonalFN, when we review mutual fund portfolios of individuals, we find that several of them hold 50+ schemes and multiple folios within the fund house.

While diversification is the basic tenet of investing, over-diversification may end up diluting or affecting your portfolio returns. Additionally, there is a possibility of an unintentional portfolio overlap among the various schemes within your portfolio. To learn more about portfolio overlap, watch this video:

So, as Phil Fisher (Warren Buffett’s early mentor and author of numerous books on investing) said, “Don’t overstress diversification”. Remember, too much of anything is good for nothing.

Beyond a point, every scheme you add to your mutual fund portfolio…

Just occupies a place in your portfolio
Doesn’t help lower the risk
Increases the burden of monitoring
Discourages optimum use of resources
Offers no extra benefit

Now, you may ask: How many mutual funds should I invest in?

Well, honestly, there is no magical number or definitive answer.

But surely it shouldn’t be excessive, whereby managing the portfolio becomes complicated and a burden.

You need to strike a fair balance across categories and sub-categories of mutual funds schemes.

Equity Mutual Funds

Broadly, when it comes to equity mutual funds, you should be fine with holding 7 to 8 of the best mutual fund schemes with distinctive investment mandates.

In this respect, you could follow a Core & Satellite Approach, a time-tested investment strategy followed by some of the most successful equity investors around the world.

Your ‘Core’ holdings (65-70% of your equity mutual fund portfolio) may comprise a best Large-cap Fund, a Flexi-cap Fund, and a Value Fund/Contra Fund. These shall offer more stability to your portfolio.

Whereas the ‘Satellite’ holding (can be around 30-35%) could comprise of a Mid-cap Fund, a Large & Mid-cap Fund, and an Aggressive Hybrid Fund.

How much you allocate to each of these sub-categories, essentially should be in congruence with your risk profile, the financial goals, and the time in hand to accomplish the envisioned financial goals.

Such an approach shall help you deal with volatile equity markets, focus on time in the market, add stability to the portfolio, and prove to be a wealth multiplier in the long run.

[Read: Is It the Right Time to Invest in Mutual Funds Now]

Debt Mutual Funds

When investing in debt funds, you need to prioritise safety over returns. Investing in debt funds is not risk-free or safe. Hence, avoid adding debt funds across all the sixteen sub-categories.

Choose schemes paying attention to your personal risk profile and liquidity needs/investment horizon.

For a longer investment horizon of 3 to 5 years and to play the interest rate cycle, the best Dynamic Bond Fund may be considered. Similarly, for an investment horizon of 2 to 3 years, a Banking & PSU Debt Fund could be a suitable choice.

For a shorter investment horizon, a Low Duration Fund (for an investment horizon of up to 1 year), Ultra Short Duration Fund (for an investment horizon of 6 to 12 months), and a Liquid Fund (investment horizon of 3 to 6 months) could be among your best options.

It’s important to evaluate the portfolio characteristics, mainly the quality of papers and maturity profiles, to pick among the best debt funds.

Gold Mutual Funds

Gold plays the role of an effective portfolio diversifier and is considered to be a safe haven or a store of value in times of economic uncertainty. Thus apart from holding equity and debt schemes, it would be sensible to tactically own gold in your portfolio (up to 15 to 20%) in the form of a gold ETF and/or gold saving fund, which are the smart ways to take exposure to gold.

[Read: Gold ETFs vs. Gold Mutual Funds: Which One Should You Choose?]

Altogether, a range of 8 to 12 mutual funds should be a comfortable holding size.

Keeping your portfolio simple and optimally structured could help you generate decent real returns.

If you are owning a heavy, overcrowded, and cluttered mutual fund portfolio, here’s how you could trim it down:

With a suitable asset mix (of equity, debt and gold), the returns of the portfolio are optimised, otherwise, it inflicts unwarranted risk. The asset allocation resetting exercise, in which you may have to redeem from schemes of a respective asset class, may help lessen the size of your portfolio.

Remove schemes with portfolio overlap — A certain degree of portfolio overlap is unavoidable and, therefore, acceptable. But if it is remarkably high, such as 65% or more, it may inflict concentration risk.To check mutual portfolio overlap, there are several online tools. All you have to do is select the category and sub-category and then enter the scheme names therein to check. Care should be taken to compare funds from the respective category and sub-category.
Redeeming from schemes that do not align with your financial goals – It is possible that you invested in certain investment schemes following what friends, relatives, colleagues, neighbours, etc., did with their investments but do not actually align with your risk profile, broader investment objective, financial goals, and investment horizon. In such a case, redeeming certain schemes makes sense.
Removing schemes whose objective and strategy have changed – The investment objective mandate/strategy of the scheme may have changed, or owing to a change in its sponsors or asset management company, the fund management philosophy has transformed.These material changes may have a bearing on the investment objective and the risk-return expectations from the scheme. In such a case, it would be prudent to eliminate such schemes if they do not align with your needs.
Resetting asset allocation – Asset allocation is the cornerstone of investing. Moreover, it’s not a one-time exercise but an ongoing one. Based on financial circumstances, risk appetite, age, milestone events, risk-return expectations, outperformance or underperformance of the asset, investment objective, and time in hand before the envisioned financial goals befall, asset allocation needs to be timely reviewed.
Doing away with underperforming mutual fund schemes – You see, consistent underperformance of your investments can weigh down on your portfolio returns. It makes sense to clean up the portfolio in such a case and hold only the ones that have a consistently appealing performance track record.However, care should be taken to ensure that enough time is given for schemes to prove their worth. Do not judge the scheme based solely on its short-term underperformance, say 6 months, 1 year, etc.Over a longer period (of at least 3 years) and market cycles (bull and bear phases), if the scheme has consistently underperformed (in terms of risks and returns) its benchmark index and peers, then redeeming from such schemes would be sensible rather than holding on to them (hoping that they would perform someday).

[Read: 5 Reasons for Selling Your Mutual Funds Wisely]

But in this entire clean-up and portfolio review exercise, you need to keep an eye on the market conditions that might have a bearing on the decision to sell, plus be mindful of the tax impact and exit load (if any).

Apart from the above, consolidating the mutual fund folios (a unique number allotted to every mutual fund) with the respective fund house would be sensible. Consolidating the mutual fund folio simply means merging two or more folios into one folio. A single folio can be used for schemes within the respective fund house (instead of having multiple folios within the fund house). This shall help you track your mutual funds with ease.

Consolidating the mutual fund folio can be done offline by duly signing and submitting to the RTA (Registrar and Transfer Agents) the ‘Request for Consolidation of Folios’ form.

Alternatively, it can also done online- https://www.camsonline.com/Investors/Service-requests/Service-Request-Forms/Folio-Consolidation.

Mutual fund folio consolidation can also be done on www.mfcentral.com, an investor services hub conceived by KFintech & CAMS.

Finally, keep in mind that following a thoughtful approach brings peace of mind and paves the path to your financial well-being and success.

Happy Investing!

This article first appeared on PersonalFN here