How many mutual funds (MFs) should you invest in? Roopali Prabhu, Chief Investment Officer and Co-head Products & Solutions at Sanctum Wealth says that she has seen a portfolio with 136 stocks and 72 MF schemes! Deepak Chhabria, CEO and director, Axiom Financial Services, says that a potential client once wanted to invest Rs 25,000 in MFs through systematic investment plan (SIP) with Rs 1,000 each in 25 schemes. “Left to me, I’d have done the same SIP in just three schemes,” he says. The client went away elsewhere.
For years, the likes of Prabhu and Chhabria have battled with bloated and over-sized portfolios and faced the challenge in consolidating them. A consolidated portfolio has many benefits. It’s easier to track, involves less paperwork and a spike in one or a few schemes can lift your portfolio returns. The question is, where do we make a start? There is no one way of consolidating your portfolio and bringing your MF holdings down to more a manageable level, but here’s a path.
How many schemes should you have?
Experts say that many investors don’t even realise that their portfolios need consolidation. Different financial planners have various thresholds by way of a certain number of schemes beyond which if you hold any, it’s time to consolidate. Prableen Bajpai, Founder, FinFix says that if you have more than 5-7 equity schemes or more than two or three debt schemes, it’s time to consolidate.
Atul Shinghal, chief executive officer, Scripbox (a Bengaluru-based online investment firm and a robo advisor) suggests taking stock of your entire portfolio, as a first. Next, he adds, “link schemes to your various financial goals.” For instance, as part of its robo advisory services to clients, Scripbox offers investment packages for four different goals ranging from long-term savings to putting aside for emergencies. Each of these packages have just 2-3 schemes. The pure equity funds’ package, meant for long-term savings, has 8 schemes. He says that if the value of any schemes is less than 3-5 percent of your overall portfolio, it won’t make any difference to your portfolio. But if the portfolio size moves up, he adds, then the number of schemes can go up too.
Prabhu says that investors get trapped in their biases. Irrespective of their income and investable surplus, investors don’t want to invest beyond a particular amount, say about Rs 2 lakh or so, per MF scheme. “Even if their income goes up from, say Rs 10 lakh to Rs 20 lakh over time, they still don’t want to invest more than a certain (and same) amount in each MF scheme. This leads to over-diversification over time,” says Prabhu.
Exit loads, taxes
Depending on how big your portfolio is, consolidation takes time. This is because whenever you sell MFs, you pay taxes. If you sell debt funds before three years, you pay short-term capital gains (STCG) tax as per your income tax bracket (30 percent plus surcharges and cess, if you fall in the highest tax bracket). Debt funds sold after three years attract a long-term capital gains (LTCG) tax. Similarly, equity funds attract STCG tax of 15 percent (if gains are in excess of Rs 1 lakh) if you sell before a year and 10 percent if you sell after a year as LTCG tax.
“Tax is important,” says Mumbai-based financial intermediary Sujata Kabraji. “I may not be able to make a 30 percent return for my client. But I can save them 30 percent tax,” says Kabraji, adding that when it comes to selling debt funds, she is extra careful. But what to do if there are bad-performing schemes in your portfolio. “Be ruthless in that case,” says Kabraji. Otherwise, it’s best to wait till the capital gains and exit load threshold is crossed, to lower your cost burden.
What to keep, what to sell?
Now comes the toughest part. Bajpai says one easy way to spot an excess of schemes is to see how many tax-savings or equity-linked savings schemes (ELSS) funds you have. “Once you align your ELSS schemes to your overall portfolio, instead helping you save some taxes, it’s easier to spot the excess,” says Bajpai.
Sometimes, portfolios get bloated because of a large number of liquid funds, most of which have negligible sums lying in them. This happens, because investors start systematic transfer plans from liquid funds move the money to an equity fund. But even after the transfer is complete, a residual amount is left behind in the liquid fund.
Chhabria has a solution. At the end of every month, his firm conducts an audit for all its clients and nudges them to transfer the residual amounts to equity funds.
Financial advisors also analyse portfolios to see stock duplications in the underlying portfolios, something not all investors can do by themselves.
Look at the management styles. Too many growth styled portfolios or just value style portfolios are not good. Try to have a mix of both.
Says Bajpai, “If you cannot remember the names of all your schemes and count them, you have too many.”