Simple ways to streamline your mutual fund portfolio

CHENNAI: Once you have been investing in mutual funds for a few years, the chances are that the portfolio now would have several (and at times, just too many) schemes. And this is a common problem that investors face. It all starts with “trying-to-diversify”. But while new schemes get added to the portfolio, old ones are not removed in time. This results in an unnecessarily high number of funds in the portfolio.

While you will often hear people talk about the ‘right number of funds to have’, the fact is that there is no one right answer.

If your portfolio is small, then having a small number of funds is enough. But if it’s a very large portfolio of an HNI or UHNI, then the number of funds may be larger.

But coming back, if you think you also have too many funds, then here are few suggestions to reduce the portfolio clutter:

Exit funds with less than 5-6% weightage

If you have a very small allocation to certain funds, where say you may have invested a while back or have stopped SIPs in, and you don’t plan to add more, then it is better to exit them. The reason is that such funds anyways have too small an allocation to make any sizeable impact on overall portfolio returns.

Try to exit active largecap funds gradually

Nowadays, active largecap funds find it very hard to beat index returns consistently. And they also carry higher expenses. So, if not immediately, then eventually it makes sense to exit active largecap funds and take your exposure to largecap stocks via passive index funds only. This can be via Nifty or Nifty100-based index funds.

Exit under-performersafter a while

If you have a fund which hasn’t been doing well compared to benchmark or category peers for more than say about 2 years, then consider it for exiting. While short-term underperformance is okay, it is always advisable to give the fund and manager some more time to see if their strategy recovers. So compare the past performances in 1, 2, 3 and 5-year rolling periods with the peer group and benchmarks. If the underperformance is consistent, then consider exiting.

Don’t keep too many mid and smallcap fundsUnless you have a large portfolio, it’s better to limit the number of midcap and smallcap funds to one each or a maximum of two. Having too many schemes within these categories will only lead to portfolio overlap and you ending up owning an index-type portfolio in mid-smallcap space. So, if you are investing in standalone midcap and smallcap funds, then limit yourself to a maximum of 2 funds in each of these categories. Else, if you are investing in a Flexicap fund which too has exposure to mid-smallcaps, then you can just limit these funds to one each.

No need for sector & thematic funds

Most investors don’t need to invest in sector or thematic funds. Their investment needs are comfortably met by diversified funds. Sectoral funds are best for those who have an understanding of the sector and when it does well. Such investors can occasionally invest in sector/thematic funds based on their views on sectors. For everybody else, these aren’t required. So if you have such funds and their allocation is also not very large, plan to exit them gradually and avoid them in future as well.

Avoid NFOs unless the offering is for something unique which is not already part of your existing fund portfolioWhile reducing portfolio clutter is a good thing, you also need to keep an eye on the capital gains taxes to be paid when exiting funds. If you have several funds and you wish to reduce the number, then the cleanup will require you to be careful about how and when to exit in a phase-wise manner to minimize the impact of LTCG and STCG taxes.

(Dev Ashish is a SEBI-registered investment advisor and founder of Stableinvestor.com, who provides fee-only investment advisory services)

DISCLAIMER: The views expressed are only for informational use. Readers should consult professionals before investing