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Do you find yourself managing multiple mutual funds in your investment portfolio? It's pretty probable, as our recent analysis of around 48,000 investor portfolios revealed that approximately 38 per cent of them held more than 10 funds. That's nearly four out of 10 investors!
A deeper analysis revealed that 97 per cent of individuals holding more than 10 funds typically possess over five equity funds , while around 30 per cent of them also have more than three debt funds . Interestingly, those initially having five equity funds often expand their portfolio to include 16 funds across various categories, even venturing into high-risk options. Similarly, individuals starting with three debt funds end up managing eight.
To illustrate the extent of over-diversification, one portfolio even comprised a staggering 260 funds.
But a cluttered portfolio has many disadvantages. For one, even you forget what funds you own, let alone highlighting the impossibility of tracking each fund.
Second, it can impact the efficiency of your portfolio. Here's how:
A portfolio of 24 funds
The performance (and decline) of a cluttered portfolio
| Investment amount (Rs lakh) | 24 |
| Investment value (Rs lakh) | 49.12 |
| Returns (per cent p.a) | 13.6 |
| Cost (Expense ratio - per cent p.a) | 0.78 |
| No of stocks held (indirectly) | 500+ |
| No of debt instruments held (indirectly) | 400+ |
| Note: The number of funds for each category is based on what an average cluttered portfolio consisting only of direct plans looks like. Investment value, returns and cost are averages based on 10,000 simulations of a randomly selected fund portfolio. | |
As seen in the above table, allocating Rs 14,000 monthly across 16 equity funds between January 1, 2014, to January 14, 2024, culminates in a portfolio having 500+ stocks. That's as good as investing in the entire BSE 500.
Instead, one could simply opt for an index fund . Not only is it more straightforward, but it also proves to be cost-effective, boasting much lower expenses in comparison to the current portfolio's 0.78 per cent.
Meanwhile, the Rs 6,000 monthly investment in eight debt funds from January 1, 2014, to January 14, 2024, means the investor is an owner of 400+ debt instruments.
Furthermore, if you think about it, if the focus is solely on maximising returns, why not achieve comparable - if not better - results with less complexity?
How to declutter your portfolio
Trimming down your portfolio can be challenging. Knowing what to keep and what to sell can be a complicated task. Plus, you'll need to consider tax complications while selling your funds.
But worry not. We offer three ready-made solutions to help you turn your portfolio into a lean, mean, profit machine.
Option 1: Simple yet effective strategy
2 aggressive hybrid funds + 1 liquid fund
These funds offer a balanced mix of roughly 70 per cent equity and 30 per cent debt.
For emergencies, allocate six months of expenses to liquid funds.
Ideal for new investors navigating market uncertainties.
Risk factor? Lowest among the three options.
Option 2: The flexi approach
2 flexi-cap funds + 1 short-duration fund + 1 liquid fund
Opt for two flexi-cap funds with different investing styles, one with a growth-oriented approach and the other with a value-oriented strategy. Diversifying investing styles helps balance risk and potential returns in your portfolio.
Supplement with a short-duration debt fund for one to three-year goals and keep a liquid fund for emergencies.
Suitable for investors capable of annual portfolio monitoring and rebalancing.
Risk factor? Slightly higher than the first option, but equity volatility tends to smooth out in the long run.
Option 3: The low-cost approach
1 index fund + 2 mid-cap + 2 small-cap + 1 short-duration fund + 1 liquid fund
Opt for a Nifty or Sensex-tracking index fund, complemented by two mid-cap and small-cap funds.
Include a short-duration debt fund and a liquid fund for the debt component. This mix adds diversity and spice to your portfolio.
Suitable for aggressive investors seeking adventure and hands-on control while prioritising lower expense ratios.
Risk factor? Higher than the two options. But risk usually flattens in the long run.
Having crafted three decluttered portfolios, let's delve into their long-term performances.
Bloated portfolio vs the three lean portfolios
The leaner portfolios (Options 1, 2 and 3) can provide as much - if not much more - returns in the long run
| Option 1 (Hybrid) | Option 2 (Flexi) |
Option 3 (Low cost) |
Bloated portfolio | |
|---|---|---|---|---|
| Investment amount (Rs lakh) | 24 | 24 | 24 | 24 |
| Investment value (Rs lakh) | 49.12 | 53.08 | 52.13 | 49.12 |
| Returns (per cent p.a) | 13.6 | 15.1 | 14.7 | 13.6 |
| Expense ratio (per cent p.a) | 0.92 | 0.73 | 0.38 | 0.78 |
| No of stocks held (indirectly) | 97 | 60 | 268 | 500+ |
| No of debt instruments held (indirectly) | 113 | 142 | 142 | 400+ |
| Note: The funds for each approach have been picked based on their long-term performance as of January 1, 2014. Style diversity has been considered while selecting the funds. All selected funds are direct plans. | ||||
So, which option is the best?
The trimmed portfolio outperforms the cluttered one.
Even Option 1 of two aggressive hybrids and a liquid fund can match the cluttered portfolio's returns.
The other two options can outperform the cluttered portfolio by as much as 1.5 per cent.
If you think the difference is still minimal, consider this: A 1.5 per cent difference can lead to you earning as much as Rs 1.04 crore in 15 years!
Also read: Cut the clutter: A step-by-step guide to trim your portfolio
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