Readers often send us their mutual fund portfolios and ask for help in decluttering them. That is reduced unnecessary funds. Since we do not offer investment advice, we can do the next best thing – offer some generic steps to DIY this decluttering process.
The first step is to recognise clutter. I hold 8 funds. If I posted just that information in a personal finance forum and asked, ‘Is it too many?’, at least a few answers would say, ‘Yes. ‘ Someone might even advise me on the ideal number of funds a folio should have.
However, the context is missing here. I can have 4 funds for my retirement goal and 4 for my son’s education, and if I think that is fine, it is fine. There is no clutter. While 8 may seem like a big number to the typical reader, it is a perfectly manageable number to the investor with a plan.
What is cluttered -our portfolio or our minds? It is always the mind, is it not?! The culprit is how 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. I must realise the fund’s objective and how it can find a place in the portfolio.
- I will not buy a new fund unless there is a clear need for it in the portfolio.
- I will not buy funds because everyone is talking about it.
- Even if I find two similar funds in a goal portfolio, I will not make knee-jerk reactions in removing one.
There is a flaming hurry to unclutter the mind and have a process in place for a goal-based portfolio review. There is no flaming hurry to reduce the number of funds.
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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.
What should I do if all this is in place and I hold too many funds?
Analyze weights: What is their value in relation to the entire portfolio value?
- 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 (or other asset classes) when there is a wide-market fall or when you rebalance the portfolio.
- All MF units 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.
Only when you have many equally weighted funds will there be a dilemma. It can still be solved by deciding on a strategy:
- “My portfolio should be predominantly passive funds.”
- “I want to hold a large-cap dominated portfolio with a mix of active and passive funds.”
- “My folio should hold X% of large-caps, Y% of mid and small-cap with Z% of international equity”.
Which strategy should you choose? It does not matter! There are multiple solutions to the problem of goal-based portfolio management. Multiple paths will take you where you want to go, provided you have the discipline to stay the course and the confidence to correct the course periodically.
So, choose a strategy that appeals to you. Also, see: The active vs passive debate is not of primary importance in portfolio management.
Do not look at star ratings before or after switching. Do not look at the last 1Y or 3Y returns. The funds you exit might get a higher peer rank after you exit! Regret does not accomplish much.
De-cluttering a portfolio is easy. Ensuring that it stays that way is hard! It is possible only with a clear financial plan. You can create one with the freefincal robo advisor.