This Diwali, declutter and consolidate your mutual fund investments

Too many investments

Over the years, I have seen many investor portfolios and the common factor in them is the amount of clutter. People end up having 25 or 30 different mutual funds schemes, 50-60 different stocks and too many other complex products.

Often, all of these investments do nothing for the investor in terms of diversification and give the investor the same investment exposure with higher fees and complexity.

Well-defined categories for mutual fund schemes mean that all large-cap funds have the same universe of stocks to invest in. And therefore having 4 or 5 schemes in the same category makes little sense. The alphabet soup of schemes ends up in “Diworsification.”

On this Diwali, why not use the time we have to declutter our portfolios?

Simplifying holdings

Investors may not really need more than 10 or 12 mutual funds to get true diversification. And monitoring a large number of stocks can get difficult even for professional managers. It may be better to simplify the equity portfolio to a handful of “blue-chips” that are easy to understand, have good managements and demonstrate consistent wealth creation over longer periods of time.

Whilst letting go of the clutter is important, it is also very important to decide how you let things go. One important aspect of financial planning is linking of investments to life goals. Investors have many kinds of goals: some may want to gift a property to their children; others may want to earmark funds for charity, while many would look to save for retirement.

Linking investments to goals

Investors should be extremely strategic about their assets and clearly link them to such life goals. This will then give a purpose to their investments and help plan prudently for the future. It also helps to identify assets that don’t suit a particular purpose and therefore should be switched to a different avenue.

When decluttering and consolidating your portfolio, you may realize that you have some holdings that you want to sell but don’t know where to deploy them.

This is where we can rely on another great symbol of Diwali: the triumph of the light of knowledge.

Standard and Poor’s Dow Jones Indices recently updated their mid-year SPIVA report in India for 2020. This report waxes eloquent on the benefits of investing in passive index funds.

It found that 83 percent of the large-cap funds and 88 per cent of ELSS (equity linked savings schemes) funds could not beat the benchmark over the last three years on an absolute return basis. What’s more, 92 percent of the large-caps, 88 percent of ELSS funds and 93 percent of small and mid-cap funds did not exist in their current form three years back. This is mostly due to liquidation or merger with other schemes.

What is the point in spending all the time and energy in identifying the “best fund” if, in all likelihood, it will neither beat the benchmark, nor will survive in its current form in three years’ time? This is especially true when passive funds are now available so cheaply in India.

Investors may find that simplifying their portfolios and sticking to simple low-cost funds can help them reduce the stress of picking the best fund manager. The trade-off that is made here is the knowledge that you will, by definition, get average returns. But, if the SPIVA report is to be believed, today, most investors are not even getting that. Ofcourse, if you have a trusted financial or investment advisor to help you “lighten up” your investments, then that works too.

Diwali is a time of transition from darkness into light – it illuminates the country with diyas and firecrackers and it brightens up all with joy. This Diwali let’s clean up our portfolios and move forward with new energy and invest in simple, easy-to-understand low-cost products. These may be the best things we can do for our health and wealth.

(The writer is founder and MD, Kairos Capital Private Limited)