Is Your Mutual Fund Portfolio Too Bulky?

We've all heard the old saying 'there's always safety in numbers', right? Well, this conventional wisdom does not apply to mutual funds. A bloated portfolio without incremental value can prove fatal to your long-term financial goals. What's more, it doesn't enable effective monitoring of performance.However, finding a handful of funds that perform consistently across market phases from hundreds of options out there can be a daunting task. It's like looking for a needle in a haystack. So what’s the solution?Bring diversity to your portfolio! The concept involves spreading your investment across multiple asset classes to minimise risk exposure so that sudden market bumps do not hit returns. There's no denying that diversification helps smooth the investment journey, but the addition of unnecessary stock can make things chaotic and more complex. To build an optimal portfolio, it's important to execute diversification correctly. Listed below are a few strategic principles that you should follow.

Mutual funds are touted worldwide for offering safety and diversification. The financial instrument invests in an assortment of assets according to risk tolerance, thereby sparing you the headache of picking individual stocks. But here's the catch.What if the different schemes in the mutual fund are from the same category and share similar characteristics, risks, and investment tactics? For example, your mutual funds may have only large caps, schemes of the same sector, or holdings of a particular fund house, etc. This is duplication. Owning identical stock is inefficient diversification as the basic objective of spreading your risk is lost due to the overlapping portfolio.

A diversified portfolio is deemed less risky. The sense is if a single holding tank in the turbulent times, it won't drag down the entire portfolio. Investors often mistake buying too many schemes, believing that it is good for the portfolio. On the contrary, it can be harmful.A bulky portfolio of underperforming assets can hamper growth and reduce overall returns. The trick is to focus on quality than quantity. A few good schemes with upside potential and strong fundamentals to withstand the ravages of market volatility can add value to your investment.

Managing an unwieldy portfolio with efficiency requires extra work and time. Investors often find it cumbersome to analyse, evaluate reports, or track the performance of each scheme consistently, which is vital to make informed decisions and strategic adjustments. As a result, they are saddled with a plethora of underperforming assets that impact returns and slow down growth.That's not all! Thanks to the introduction of long-term capital gains (LTCG) on equity funds, there is the added botheration of calculating tax liability. Taking charge of a few stocks, in contrast, is easy. If your portfolio has excessive funds, it's best to downsize it with guidance from a professional and weed out the laggards.

There’s no specific number to create a healthy portfolio since it is a subjective matter and depends on various factors. As a thumb rule, 4-8 high-quality funds may suffice. That being said, it's important to ensure the portfolio is well-balanced and has the right asset allocation of (large-cap, mid-cap, small-cap, and multi-cap funds and debt and equity), based on your investment tenure, risk appetite, and financial aspirations. And yes, don't get excited by the market fluctuations.Also, give your investments enough time to ride the changing market dynamics and refrain from adding new stock or switching funds frequently. All this contributes to a tangled, unmanageable portfolio.

A well-structured mutual fund portfolio with a good asset mix has the potential to perform well during a market upturn as well as a downturn. If you think you are over-diversifying, it’s time to make amends. Consult a financial expert to help simplify your portfolio by picking funds that have incremental value, don’t overlap, and promise positive returns to accommodate your investment goals.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.