Even though you may have taken full care to find best funds for investment, make sure to review them periodically
Getting an Ideal Number of Funds
Have you accumulated a good number of mutual fund schemes over a period and wonder if you should cut down? You are not alone. "Average number of schemes an MF investor holds with us is four. Many investors add funds to their portfolio based on peer recommendations or because the ratings are good," says Harsh Jain, Co-founder and COO, Groww.
Why do people hold high number of funds in their MF portfolio? Reasons are aplenty. More often than not they invest in a new fund when they have some surplus amount. Some of them start a new SIP when their income increases. This is still fine. Investing in every other new fund offer (NFO) is what creates trouble. "Some people have the misconception that buying a mutual fund with Rs 10 NAV is a profitable strategy. These people normally end up investing in every NFO of a mutual fund house over 10-15 years, ending up with 30-40 schemes. This is not a profitable strategy. Some investors start multiple folios in the same fund house as every investment goes into a new folio, this makes the portfolio unwieldy," says Suraj Shroff, Founder of Infiniti Investments.
Diversification is key when it comes to mutual fund investment. "There are positive reasons to have multiple schemes / folios based on core & satellite approach that involves different goals, minor child investments and efficient tax planning. All these can be well thought out reasons to have multiple schemes and can work well for investors too," says Shroff of Infiniti Investments.
Too many schemes
Diversification is important, but should be analysed at opportune times to avoid over-diversification. "Over diversification or adding more funds from the same category slows down growth, minimises overall returns and fails to spread out risks," says Jain of Groww.
The biggest issue is when investors have too many schemes in similar asset classes and categories. "By adding too many funds from the same category, investors tend to lose the opportunity of investing in better schemes. Despite investing in multiple mutual funds, if news or macro-economic developments have a disproportionate impact on your overall mutual fund portfolio, it is likely that your mutual fund portfolio is over-diversified," says Jain of Groww.
Too many schemes make it difficult to review and rebalance portfolios effectively. "The main problem with an investor having multiple schemes is that tracking it becomes difficult and many a times they invest in similar schemes from different fund houses that lead to a portfolio overlap and do not add value," says Shroff of Infiniti Investments.
Tax planning also becomes difficult if you have too many schemes in the portfolio. The introduction of long-term capital gains (LTCG) tax in equities has made it tougher. The problem amplifies when you have a large number of SIPs in your portfolio, because timing the exit from taxation point of view is cumbersome.
Ideal number of schemes
There can't be a suitable number that fits fall. Individual circumstances of each investor differ from one another. "The number can vary based on the goals of the investor, family members, tax status, size of the portfolio, investment strategy and mindset, among other factors," says Shroff of Infiniti Investments.
Mutual funds allow you to take exposure not only in equities but also in debt, gold and real estate. If you use it for asset diversification, you can have relatively higher number of MF schemes. "Ensure that your portfolio is balanced across asset classes and also diversified within an asset class. Make sure your portfolio has the right asset allocation based on your risk appetite," says Jain of Groww.
If we have to put a range to it, Jain of Groww says: "There can't be a magic number, but five to eight well-performing schemes are enough to build a healthy portfolio."
Shroff suggests that for a person with a reasonable size of portfolio with goals ranging from short-term to long-term, the number of funds could range between 5-10 schemes. He further suggests having three-four equity schemes, two debt funds, one liquid fund, one gold fund and one to two international equity funds.
The number of schemes can vary over the investment journey. "As the corpus size grows over the years, there is no harm in adding a few funds tactically in the portfolio though you will get advice saying the lesser the better. There is no point investing in a single scheme and worrying how it is performing every day. Managing a portfolio is not difficult with all information being readily available," says Shroff of Infiniti Investments.
Review regularly and replace the underperformers
Even though you may have taken full care to find best funds for investment, make sure to review them periodically.
"Once in a year a review of the funds and asset allocation is essential. Building a diversified portfolio with different assets and rebalancing ensures stable returns. Don't worry about short-term market movements and increase allocation during market falls. Do not invest in closed ended funds. Do not choose a fund based on its 12-month performance (top performers). Say no to new funds unless you have a strong reason to look at a specific theme," says Shroff of Infiniti Investments.
If you are not satisfied with your old fund, rather than channelising the fresh investment into a new fund you can close the old fund and switch the entire corpus into the new fund and thus keep the number of funds unchanged.
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