Holding Too Many Mutual Funds? Here's How You Can Reduce the Number of Schemes in Your Portfolio - Outside View by PersonalFN

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Holding Too Many Mutual Funds? Here's How You Can Reduce the Number of Schemes in Your Portfolio
Jun 15, 2021

Many investors often question whether they are holding the right number of mutual funds in their portfolio to achieve their financial goals. The general assumption amongst investors is that if they keep adding popular, star-rated funds to the portfolio or newly launched funds, their portfolio will be well-diversified and in a better position to deal with market volatility.

By doing so, investors often end up accumulating 15-20 mutual funds or more in their portfolio. The fact is, over-diversification is counter-productive to creating wealth.

As the saying goes "Too much of anything is good for nothing". This means, beyond a point, every scheme you add to your mutual fund portfolio...

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

All the benefits of diversification viz. lower portfolio risk, optimal returns, and stability in performance can be actually achieved with a lesser number of schemes. Therefore, it is important to know exactly how many schemes you should hold in your portfolio to optimise wealth creation.

--- Advertisement ---
FREE Event on Equitymaster's New Project

On July 29 , we are holding a FREE event to reveal Equitymaster's Great Indian Wealth Project.

At this event, we'll reveal the details of your first stock for a potential Rs 7 crore in long-term wealth.

Seats for this event are filling up fast.

Since there are limited seats, we urge you to register at the earliest.

Click here for free sign-up
------------------------------

Mutual fund schemes by nature usually invest in a well-diversified portfolio of securities to reduce the stock/sector specific risks; so, when you add one scheme too many to achieve optimal diversification, it is pointless.

Most individual investors require not more than 5-10 mutual fund schemes, depending on the size of the portfolio. These would include schemes across equity mutual funds, debt mutual funds, hybrid mutual funds, and ELSS funds.

If you are stuck with a large number of schemes and are looking to downsize it, here are some helpful ways to correct your portfolio:

1) Remove schemes with overlapping portfolio

If you hold multiple schemes within the same category, it is likely that they have invested in a same set of stocks with similar strategies. In which case, it will not add much value to the portfolio. For instance, if you own 3-4 large-cap funds, it is unlikely that all of them will turn out to be outperformers and you may end up earning returns in line with the market. This defeats the purpose of investing in actively managed schemes that usually charge a higher expense ratio to generate alpha.

To achieve optimal diversification, align your investments to your goals, risk appetite, and investment horizon, and then invest accordingly -- equity funds are ideal for long term goals, debt funds for short term goals, and so on. Trim your allocation to riskier segments such as mid-cap funds and small-cap funds (or credit risk funds in case of debt investments) if you do not have a very high risk appetite. This will help you to monitor the progress of the schemes in achieving your goals.

2) Eliminate consistent underperformers

Keep track of the performance of the schemes in your portfolio. If you find that a scheme is consistently underperforming its benchmark and the category average, eliminate it. However, do not take the decision solely on short term underperformers. The fund should be able to actively participate during recovery and bull phases, while simultaneously being able to protect the downside risk better during bear phases.

To check whether the scheme is a consistent performer, analyse it on various risk-reward parameters such as, performance across market phases and cycles, Sharpe Ratio, Sortino Ratio, Standard Deviation, etc. While determining the consistency of a scheme's performance, bear in mind the importance of its quantitative parameters such as, the portfolio characteristics of the scheme, the efficiency of the fund house, and the quality of the fund management team.

Free Signup: The Smallcap Revival Summit

3) Look before you leap

It can be tempting to invest in sectoral funds that may have generated double-digit returns in the recent past or an attractive looking new fund offer (NFO). However, you should avoid adding these schemes to your portfolio. Sector funds are highly risky due to the concentrated nature of their portfolio; timing the entry and exit in the scheme becomes important when you invest in these funds. On the other, when you invest in an NFO, there is no reliable track record of the fund's performance, portfolio quality, risk-return profile, etc. that will help you determine if it is a worthy scheme for your portfolio.

It would be better to invest in a diversified portfolio spread across categories, sub-categories, and investment styles and stick to it until your goal is achieved. Add a new scheme to your portfolio only if it can aid in diversification and aligns with your investment objective.

Things to consider when you offload schemes from your portfolio

Consider the costs and tax implications when you are looking to exit the scheme. Most mutual fund schemes impose exit load if the investment is redeemed (including switches) within one year. Second, you may be liable to pay capital gain tax on the gains made from redeeming investment.

In case of equity funds, long term capital gain tax will apply at the rate of 10% if redeemed after one year (only on gains of over Rs 1 lakh in a financial year) and 15% in case of investments held for less than a year.

For debt funds, investment of more than three years is considered as long term and the gains are taxed at 20% (excluding surcharge and cess) with indexation benefit. In case of investment of less than three years, the gains are taxed as per the investor's income tax slab rate.

--- Advertisement ---
Predict Stock's Next Move Using Volumes

Volumes play a key role in identifying emerging trends.

They help you track activities of big smart investors.

Watch this video to learn how to use volumes to identify trades with astonishing risk:reward profile.
------------------------------

To conclude

Review your portfolio periodically (at least once in a year) to see if it is well placed to achieve your goals. When you review the portfolio, check whether there is a need to weed out the underperforming schemes and replace it with a more suitable alternative. Also check if there is a need to rebalance the portfolio so as to align it with your personal asset allocation plan

If you need a professional help in consolidating or reviewing your portfolio, sign up for PersonalFN's Mutual Fund Portfolio Review Service. This is a one-time service to help you review your existing portfolio of mutual funds, and suggest you mutual fund portfolio that match your financial goals.

Our report will be complete with our views and analysis of your existing portfolio, action steps, and fund recommendations that would help you maximize your portfolio returns. Click here to get your mutual fund portfolio reviewed.

Author: Divya Grover

This article first appeared on PersonalFN here.

Join Now: PersonalFN is now on Telegram. Join FREE Today to get 'Daily Wealth Letter' and Exclusive Updates on Mutual Funds

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Equitymaster requests your view! Post a comment on "Holding Too Many Mutual Funds? Here's How You Can Reduce the Number of Schemes in Your Portfolio". Click here!

  

More Views on News

Top 3 Agriculture Stocks to Keep Your Eye On (Views On News)

Jun 28, 2021

Top agriculture stocks that should have your attention now.

5 Popular Stocks with Zero Promoter Holdings (Views On News)

Jun 21, 2021

List of stocks that have zero promoter holdings, where FPIs hold stake.

Top 5 Recent IPO Developments You Should Know (Views On News)

May 12, 2021

So far in 2021, IPOs in India have raised nearly US$ 3 bn, the best start to the year since 2018.

Axis Long Term Equity Fund: Seeking Opportunities across Market Cap (Outside View)

Jul 23, 2021

PersonalFN's analysis on the features and performance of Axis Long Term Equity Fund.

A Trading Hack to Multiply Profits (Fast Profits Daily)

Jul 23, 2021

Use this trading hack and get a big boost in your trading profits.

More Views on News

Most Popular

A 25 Bagger Indian Stock at the Centre of the Global Semiconductor Chip Shortage (Profit Hunter)

Jul 13, 2021

One technology company in India is grossly underrated despite its dominant role in semiconductor chip designing.

RBI Opens a New Market for Investors (Fast Profits Daily)

Jul 16, 2021

You now have a new way to create wealth. Grab it with both hands.

OPEC is Dying! RIP OPEC (Fast Profits Daily)

Jul 13, 2021

Why the global oil cartel is unravelling and how India stands to gain.

Top 4 Companies that Are Strong Monopolies (Views On News)

Jul 10, 2021

A close look at the top 4 companies with a dominant position in their industry.

A Better Way than the Zomato IPO to Play the Food Delivery Megatrend (Profit Hunter)

Jul 14, 2021

A unique backdoor way of making big profits from smallcap companies.

More

Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2021
Get our special report Multibagger Stocks Guide (2021 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE SENSEX


Jul 23, 2021 (Close)

MARKET STATS