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Several investors struggle with maintaining the right number of funds in their investment portfolio. They often justify this behaviour with a concept well known among individuals – diversification.
In the name of diversifying, one’s investment portfolio, investors often end up accumulating a large number of funds in their portfolio. However, one must understand that overdiversifying might not do any good to your portfolio; worse, it might even deplete you of potential returns.
In this article, we will understand how you can successfully decrease the number of mutual fund units in your investment portfolio.
Before we understand, how to reduce the mutual fund units in one’s portfolio, what is the ideal number of mutual fund units to hold? Some might say it’s 5-6, while others may say it can be high as 10-12.
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Well, there’s no concrete number behind this idea of ideal number of funds in one’s investment portfolio. It all depends on one’s investment portfolio and their investment size.
For instance, if you are investing a substantially lower amount in mutual funds, then you might consider diversifying across just a few funds. However, the same might not hold true for someone investing a substantial amount in the markets.
Some experts believe that it might not be a good idea to be overdiversified in equities, however, being slightly over-diversified in debt funds might not be a terrible idea. Here’s how you can do that:
#1. Eradicate Funds That Have Less Than 5-7% Weightage
These funds comprise of those funds that you may have stopped your SIP investments or may have invested in some time back. This could also include funds in which you might have invested on an ad-hoc basis just to keep up with the trend.
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You might wonder why you are expected to remove these funds from your portfolio? This is because due to their low allocation, it might be not possible for these funds to create an impact on your portfolio even if they do well.
#2. Slowly Exit Active Large-Cap Equity Funds
As majority of the large-cap equity mutual funds are endowed with overlapping investment portfolios, it might be advised to get rid of these mutual funds and rather stick to a few index funds that offer adequate exposure to large cap markets.
#3. Do Not Invest Heavily in Small Cap or Mid Cap Equity Funds
It might be a good idea to hold some actively managed small cap and mid cap equity mutual funds. This is because as these funds enjoy the status of low market maturity, it might make sense to pay slightly extra for active management in order to enjoy better yields.
Again, do not heavily invest in any of these mutual fund categories. It might be a good idea to stick to a maximum of two funds from both the category.
#4. Do Not Forget to Consider the Tax Aspect
Before you remove certain funds from your investment portfolio, do not forget to factor in the tax aspect on your investments. You are expected to pay capital gains on your investments when you exit mutual fund schemes.
The amount of tax depends on the holding period of your investments and the type of fund you choose to invest in.
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