What are the ways through which one can reduce number of mutual funds in a portfolio?

This is quite an arduous task for most of the investors for whom I am writing this blog. Reason, is quite simple we have been reading this, listening to it but most often we do not follow this.

Most people end up buying more funds in order to enhance their returns but one reason that stands out is many investors feel that the more the funds they have, the better the extent of diversification.

 Please understand that the major purpose of diversification is to reduce your risk and not to boost your returns!! Sadly, we still chase returns and end up complicating our overall investments. Reason: We are greedy, we chase returns and, in the end, we find it really difficult to manage our overall portfolio.

Don’t forget that each of the mutual fund that you buy is a cluster of several stocks, so you are actually investing in all of them. Recently, I evaluated one portfolio where the person had bought 48 mutual funds and the number of underlying stocks in those funds were 917!! So, think hard and don’t make this mistake.

Try to exit such funds which are the underperformers – First, find out the funds in your overall portfolio that have been underperforming for quite some time now and then exit them.

However, a mere blip or a short-term underperformance should not be the reason to sell your fund. Check if the fund manager who had been managing the fund for a long while has moved out which as resulted in the fund behaviour. Take in to consideration the long-term performance vis-à-vis the given category of the fund which you are assessing. Also check the fund’s performance across the different market cycles.

Try to sell thematic or a sectoral fund in your portfolio – Such funds are really risky in nature and may behave quite erratically. Like the recent corona virus pandemic has benefitted the health care sector a lot. As the consumption and overall euphoria towards immunity building products increased, this led to higher sales and the companies benefitted a lot. Resulting in the sky rocket share price and the sector’s performance. Remember as this enthusiasm fizzles out, so will the returns.

Cut down on duplicate funds – If you have similar nature funds, you may want to keep just one of each type. For instance, if you have several large cap funds in your portfolio, you may want to stick to just one by doing so you do not duplicate the funds and will get out of the mess of managing a many.

Remember to follow the core portfolio approach: For instance, you can have two-three diversified fund or a set of balances funds for those not willing to take too much risks as your core portfolio holdings. To it you can add any other funds, such as a mid/small-cap or even an international one, as a supplementary fund. Remember, your core portfolio will command most of the money invested, while the satellite holdings like an international fund or a small cap or a sectoral/thematic fund will help give your overall returns a boost.

Remember, your returns are driven by the quality of your fund selection, not the quantity. So, having a four-five funds are quite enough for you till you decide to complicate your overall investment portfolio. Till then happy investing