If maintaining your mutual fund portfolio is challenging, it might be because you have a very untidy portfolio that has to be cleaned up. In the past few years, mutual funds have gained popularity among regular investors. SIP investments have risen in recent years, as evidenced by the Association of Mutual Funds in India’s (AMFI) Systematic Investment Plan (SIP) contribution data.
However, due to a lack of basic knowledge of mutual funds and poor financial guidance, investors frequently wind up with a bloated mutual fund portfolio containing underperforming funds, repeat investments, and inefficient asset allocation. In this blog article, we’ll look at what do you mean by ‘clutter’ in a mutual fund portfolio and how to simplify it.
Recognise the Clutter:
First, find out how many mutual funds are in your portfolio. If you’ve been investing for a while now, you’ve most likely acquired a few mutual funds, either by putting your money in a happening mutual fund, a New Fund Offer (NFO), or by following the advice of your friends and relatives. The rationales might be several, but the main one is to earn more returns while taking on less risk. Diversifying your portfolio helps to lessen risk.
A lot of experts discuss the benefits of diversification and why you ought to invest in different funds to mitigate risk. Nonetheless, the bulk of these recommendations do not specify how many mutual funds to invest in. As a consequence, it is vital to understand what is way too much for you. Anyone who has been regularly investing for five years or more typically maintains a portfolio of many funds. The majority of these choices would have been made over the course of time, taking into account changing market dynamics or due to their personal financial circumstances.
Yet having too much mutual funds has a negative. Holding a large number of funds in your portfolio might make it difficult to keep track of. You could claim that having more funds equals better diversity, but there’s a chance that a few funds will have assets in the same sectors or even in same asset classes, which won’t help with the diversification of your portfolio. Let us try to understand this through an example.
Assume you want to diversify your mutual fund portfolio by investing in large-cap, mid-cap, and small-cap funds. In order to further diversify your portfolio, think about investing in sectoral funds like banking and financial services, pharma, IT, ESG, and so on. In addition, you may add NFOs that you find appealing. Over time, you may accumulate 20-30 funds in your portfolio. Furthermore, investing in this manner causes portfolio duplication. This is one such example, but there are several other elements that lead to a cluttered mutual fund portfolio. As a wise investor, you should de-clutter and streamline your portfolio a minimum of once a year.
Cut the Clutter in your portfolio:
You may de-clutter your portfolio using a variety of steps discussed below:
- Defining Asset Allocation Strategy – During the process of making financial choices, many investors are influenced by emotions or advices from family members and friends. However, these investments may not be suitable for their time horizon or risk acceptance. The first step in addressing erroneous judgments is to devise an asset allocation strategy. Asset allocation is the process of managing risk and return by distributing assets across many asset classes such as stocks, bonds, cash equivalents, gold, and so on, based on your willingness to take risks, financial objectives, and investment horizon.
For instance, equities have the ability to outperform inflation and other asset classes over time, and hence investments with a five-year maturity period must be distributed to equities. In a similar way as equities can be unstable in the short term, risk-averse investors should choose debt funds to achieve their financial objectives that mature in three years or less. Debt funds provide more capital preservation and income consistency than equity funds. A carefully constructed asset allocation strategy can help you achieve the highest risk-adjusted gains for your diverse financial goals.
- Rebalancing the Portfolio – After you’ve identified your financial goals and created an asset allocation strategy, rebalance or reorganize your portfolio to reflect them. Identify funds that are a suitable fit for your goals and asset allocation strategy.
- Periodically revisit of your Financial Objectives – Financial goals are the sums of money required to attain certain life objectives, such as investing for a child’s future education, acquiring a home or car, or building a nest egg for your post-retirement years. Thus, it is prudent to review your financial objectives to evaluate any changes to be done to the required corpus sum. Online SIP calculators can help you estimate the monthly contributions required to reach the updated corpus for each of your revised monetary objectives.
- Try to get rid of laggards – Even if your current portfolio constituents are compatible with your asset allocation strategy and financial goals, you may realize that a few of them frequently underperform their peers and benchmarks. This is because successful mutual fund schemes cannot promise future performance. Furthermore, certain funds may continuously underperform over time. As a result, it is vital that you identify and liquidate these funds from your portfolio. Each quarter, assess your current funds’ performance to their benchmark indexes and their peers. Redeem funds that have consistently underperformed their peers and benchmarks during the previous ten rolling quarters.
- Review your Mutual Fund Portfolio – Once you’ve de-cluttered your mutual fund portfolio, review it at least once a year. This would allow you to adapt your mutual fund portfolio based on shifts in your degree of risk tolerance, financial goals, several macroeconomic factors, and the fund’s basic features. Periodic reviews can also assist uncover underperforming funds and correct variations created by the previous portfolio asset mix. Compare your funds’ performance to that of peer funds, and benchmark across both short and long time periods. This would be beneficial in establishing if such funds regularly outperformed their benchmarks and peers in all market conditions. However, have in mind that recent superior performance may not be reproduced in the future. Fund comparisons can offer you an idea of how well an investment strategy performs in different market conditions.
Final words:
The overwhelming number of funds, and therefore clutter in your mutual fund portfolio, is definitely related to a lack of good guidance, since individuals are fundamentally unaware of how to invest in mutual funds. This typically results in a large amount of unused funds in your portfolio that add very little when it comes to returns or diversity. If your portfolio has more than 15-20 funds (based on your investment amount), it’s time to tidy it up and eliminate any unneeded confusion over portfolio management.
