Reducing the number of funds in their portfolio is a genuine problem that many investors have. A word we all are familiar with, ‘Diversification’, is often thrown around to justify the high number of funds people have. But beyond a point, adding more funds doesn’t help with diversification at all. In fact, having too many funds only results in you having an index-type portfolio.
A lot of people talk about ‘what is the ideal number of funds to have’. Some may say five, while others will give ranges, say 6-12. But I don’t think there is anything sacrosanct about this idea of the ‘ideal number’ of funds.
If you are investing a small amount, then it’s obviously a good idea to have very few funds. However, the same may not be exactly true for someone having a very large portfolio.
My view is that being over-diversified in equity funds may not help much, but when it comes to debt funds, being a bit over-diversified isn’t that bad an idea.
Remove funds having less than 5-7 percent weight in portfolio: These are funds that you may have invested a while back or would have stopped your SIPs in. Or, you may have invested a small random amount on an ad-hoc basis in the past. Why remove these? Because these have too small an allocation to impact overall portfolio returns. Even if this small allocation does very well, it won’t move the performance needle much for you.
Gradually exit active large-cap funds: It now makes sense to have large-cap exposure via index funds alone. Most active large-cap index funds have overlapping portfolios. So it’s better to gradually get rid of them and simply keep 1-2 index funds that provide sufficient large-cap exposure.
Don’t own too many mid and small-cap funds: The mid & small-cap space is where active funds are still good options. Though there is nothing bad with passive ones, given the low market maturity down the market-cap ladder, paying a bit more to active funds for potentially better returns is still justified. But that said, if you have multiple mid-small cap funds, then that is not right. Limit yourself to a maximum of two funds each in these categories.
Exit consistent underperformers: This is an easy one. Neither should you not focus on one-year performance nor should you exit after a year of underperformance. Give more time to funds and managers to judge them correctly. Compare the past performances over 1-10-year rolling periods with the peer group and benchmarks. But if a fund is consistently underperforming its benchmark and category peers, consider exiting such underperformers quickly.
Sell sector/thematic funds: Many times people invest in sector/thematic funds based on their temporary bullish view on some sectors. But over a period of time, if many such sectoral funds have entered your portfolio, then consider exiting most of them. In my view, most people don’t need sector funds.
And it goes without saying that if you are looking to reduce the number of funds in your portfolio, don’t run after NFOs. You don’t need most of them.
Don’t forget taxes
There are capital gains taxes to be paid when exiting funds – 15 percent on the gains made in less than a year and 10 percent (on gains above Rs 1 lakh a year) if held for more than a year.
So, if you have too many funds, then a portfolio clean-up will require you to be careful about how you exit schemes gradually and systematically over a period of time so that the impact of these taxes and exit loads can be minimized if not eliminated.
If you are looking to downsize your scattered and directionless MF portfolio, then you can use a few of the above suggestions to reduce the portfolio clutter. But if you are unable to do it on your own, you can consider taking help from your investment advisor.
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