Last Updated on September 4, 2018 at 10:09 am
A look at “How do I reduce clutter in my mutual fund portfolio so that it can tracked and reviewed easily?”. Typically mutual fund investors with few to several years of experience are interested in this exercise.
The first step is to recognise clutter. I hold 8 funds. If I posted just that information at AIFW and ask, ‘is it too many?’, there would at least be a few answers which go, ‘yes’. Someone might even offer me advice on the ideal number of funds a folio should have.
However, the context is missing here. I have 4 funds tagged to my retirement goal, 3 to my son’s education and 1 to his marriage. You can read more about my goal-planning strategy in the financial audits I post in December.
While 8 may seem like a big number to you, it is a perfectly manageable number to me. I do not like the idea of holding a couple of funds for all long-term goals. For me, not all long-term financial goals the same.
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I had earlier made this point in this post: How many fund should I hold?
What is cluttered -our portfolio or our minds? It is always the mind, it is not?! The culprit is the way in which we buy funds. When I realised this about 4 years ago, I told myself,
- I will tag my existing funds to my financial goals
- I will do my best to understand the position of each fund in a goal portfolio. That is, I must realise the objective of the fund and how it can find a place in the portfolio.
- I will not buy a new fund, unless I exit an old fund.
- For that I need to know how to review a mutual fund portfolio with personal benchmarks and not star ratings.
- I will not buy funds because everyone it talking about it.
- Even if I find two similar funds in a goal portfolio, I will not make knee-jerk reactions in removing one.
After this and after a bit of staring at NAV movement, I came up with minimalist portfolio ideas for young earners
I am gradually trying to make my folio as minimalist as possible for each long-term goal.
There is a flaming hurry to unclutter the mind and have a process in place of portfolio review. There is no flaming hurry to reduce the number of funds.
Like everything else in personal finance, that number is also deeply personal. A person can have two large cap or two mid and small-cap funds from different amcs if his portfolio size is ‘big’ and he wishes to spread the risk -something that Balaji Swaminathan pointed out to me.
If all this is in place and I find that I am holding way too many funds, what should I do?
Analyze weights What is their value wrt entire portfolio value? If a few funds have large weights and a few relatively small, then you can
- choose to ignore the small-weight funds. Do not invest further in them and leave them be.
- choose to redeem from these and shift to the large weight funds.
It is only when you have large no of equally weighted funds, there will be dilemma. It can still be solved by deciding on strategy: “my folio should hold X% of large-caps, Y% of mid and small-cap with Z% of international equity”.
Do not look at star ratings before or after switching. The funds you exit might get a higher peer rank after you exit! Regret does not accomplish much.
When should I switch? Should I wait for markets to improve, so that I can exit on a high?
You could, but for a long-term goal, it will not make much of a difference, if you exit the moment you realise that the fund is a weed in your folio.
How should I switch? Should I exit in one-shot or should I transfer little by little?
All units which are free from exit load and eligible for long-term capital gain (or loss) computation can be redeemed or switched out in one shot. The rest can wait until they become eligible.
Ashal used to describe this in the JI forum as, “a switch from one express train to another, and can be done in one shot”.
De-cluttering a portfolio is easy. Ensuring that it stays that way is hard!
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