How to reduce the number of funds in your portfolio | Earn more by having the right no. of funds

[Music] foreign [Music] some years ago I had more than 20 funds in my portfolio I was trying to understand mutual funds so I experimented a lot over time without me realizing it I end up with more than 20 schemes now during all this time I would check my portfolio regularly while I had schemes that were doing well some even delivering 18 to 20 returns my portfolio returns were not even in double digits so I decided to dig in and after some analysis I realized I had made one of the classic mistakes in portfolio building and management the mistake was having too many funds with this understanding I went about clearing my portfolio and while it took some time and effort I did it and I'm glad I did it this one chain helped me improve my returns also tracking my funds is very easy now hello and welcome to the 80 Money Channel today we will talk about how you can reduce the number of funds in your portfolio and optimize it for your returns we will discuss a number of strategies that can help you do so broadly this video has three sections we will first talk about why too many funds negatively impact your returns then we will look at what is the correct number of funds in a portfolio and finally we will discuss approaches you can take to bring down the number of funds in your portfolio so let's start [Music] let's first discuss why we end up with too many funds of course each person has a different story about this but there are some common threads we always chase performance so we invest in funds that are doing well at the moment but when the fund stops performing we simply stop our sips and start investing some other fund that has topped the charts recently another reason is plain simple excitement as I confessed at the start of the video I also had too many funds I had them because I wanted to explore them all fortunately I saw sense and eventually stopped now some investors are also miss sold funds by agents and distributors or if you have relative selling funds you find it difficult to say no some funds like tax saving funds have a lock-in period so you can only exit old funds once you complete the lock-in period this can also result in more funds in your portfolio than needed these are some of the main reasons as I said everyone's story is different but if you have plenty of funds in your portfolio that's probably not good let's see why in the next section foreign [Music] there are three reasons why you shouldn't have too many funds they are challenging to manage they can pull down your returns and your portfolio becomes over Diversified almost index-like let's talk about each of them the first point is pretty self-explanatory who would deny that if you have 20 30 funds in your portfolio you will never know what's actually going on there will be funds doing well and there will be ones doing poorly they'll be duplicates there will be funds that have little money and so on and so forth and if you want to invest fresh money you won't instantly know which one to invest in a good Investment Portfolio is like a garden to make it flourish you need to take care of it if you let weeds grow unchecked your garden won't look good too many funds can also pull down your returns as the deserving ones don't get a sizable allocation let me explain it with a simple example let's say there are two portfolios of 10 lakish the first portfolio has five funds and the second has 20. for the sake of Simplicity let's also assume that you invested an equal amount in each fund after 10 years all funds gave 12 returns but One Fund in each portfolio are performed and gave 22 percent but what do you think would the portfolio returns be surprisingly in the portfolio with 20 funds you will accumulate around 33 lakhs but in the portfolio with five funds you will end up with over 39 lakhs the returns of a portfolio dropped suddenly only because there were too many funds in it now this is just a hypothetical example the reality is harsher in a large portfolio that is left unattended the underperforming schemes can seriously bring down aggregate returns so a simple thing to boost your portfolio returns is to limit the number of funds so deserving funds can showcase their magic the third point that I mentioned earlier was related to over diversification say you have 20 Equity Funds now those 20 funds will each have say 50 70 stocks of course there will be duplicates as well but still you can expect your combined portfolio to have around 500 unique stocks your portfolio and sum is index like let let me give you a simple example of this suppose you invested in the biggest actively managed funds from the large mid and small cap categories so we'll have three ones icsa Blue Chip fund HDFC mid cap opportunities fund and the Nippon India's small Cap Fund in just three funds you would have more than 275 unique stocks if you wanted to invest in an index you could have opted for an index fund and saved yourself tons of efforts right you would have also paid a lot less as well you probably invested in active funds to get better returns in the index but when you invest in too many funds that purpose is defeated let's now move to the second part of this video how many funds should you idly have [Music] there is one straightforward rule you must have as few funds as possible in your portfolio let me explain when you invest in a mutual fund you get a diversified portfolio that's one of the many advantages you get while investing in mutual funds even if you invest just a couple of thousand that money gets spread over the entire portfolio the portfolio of an Equity Fund can have anywhere between 30 to 80 stocks so investment is getting distributed across all of these so even One Fund is enough if you have a small Corpus you may need diversification as your Corpus grows but each fund must have a specific purpose for example a debt fund and a gold fund can give stability to your portfolio when markets correct a mid Cap Fund can help improve returns still your portfolio doesn't need more than six seven funds you can achieve maximum diversification with just seven funds large mid and small cap funds can give you diversification across market segments so that's three funds debt and gold schemes can help diversify across asset classes and an international fund can give you Geographic diversification that's a total of six funds and as we discussed earlier fewer funds also mean better performance now if you are more than this number the strategies discussed in the next part of the video will help you bring it down [Music] so here we are at the core of this video here we will discuss a range of strategies that you can apply to reduce the number of funds in your portfolio of course not all will apply to every case so feel free to use the ones that make sense to you let's start with the first strategy understand the allocation of each fund first you must check how much money you have allocated to each one let me give an example to explain this better let's say your total portfolio has 10 funds and its current value is 10 lakhs three funds have two lackage it means each has a 20 weight in your portfolio their total weight is 60 percent similarly some of the remaining sex fines might have 10 percent weight some five percent and so on so the first step is to list the weight of each one and now if you have some funds comprising less than five percent of your portfolio and you have stopped investing in them long ago exit them such an investment won't add any value to your portfolio their performance or underperformance is of little importance so it's better to get rid of them after this look for underperformers it's easy to say You must exit under performance the question arises here is when would you call a fund a chronic underperformer if a fund has been underperforming its peers for two or more years it can be termed as an underperformer and we could consider exiting it another option to identify is to look at their fund report card on the ET money app you will see the funds ranking on two key parameters the first is the fund's ability to deliver returns consistently so the funds that have done well over time get a better ranking than the flash in the pan performers the second is how consistently the fund has protected the returns from volatility so the funds which have displayed an ongoing ability to keep ups and downs low get a better rating now these ratings are calculated based on an intelligent mix of long term and shorter performance and this makes them even smarter now one concern investors have while exiting funds is that they will have to pay tax on the gains however it is better to pay the tax and invest your money in a more deserving fund then stay invested in a poor performer for example let's say you have invested 1 lakh rupee in an Equity Fund three years ago for a Target Time Horizon of 10 years in the last three years the fund has given an annualized return of just eight percent and it's likely to deliver a similar returns in the future now you have two options you can stay invested in the same scheme and keep earning eight percent returns after 10 years when you finally redeem the funds your Corpus will be as shown in the table on your screen the second option is to redeem your money from the scheme pay the applicable capital gains tax and invest in a better performing scheme let's say the better performing fund gives an annualized return of 12 percent at the end of 10 years after buying the first one when you finally redeem the second one the returns you will receive are shown in the table so in our example you stand to earn more in a better performing fund despite paying the tax on the Redemption of the poor performing fund so it might be a good idea to switch to a better performing fund though you may have to pay tax on exiting a fund a better performing fund can more than compensate for it all right let's move to the next strategy exiting redundant funds this is very similar to exiting underperforming funds you have to make tough choices and stick with them so when you have too many funds it's natural that several of them would be of the same type you may have two three tax savings and two three small cabin flexic funds to reduce the number of funds you can compare the performance of funds in the same category consider exceeding the funds with relatively worse performance now if you cannot make up your mind look at the parameters Beyond returns for example you can compare the volatility how long the funds have existed and so on these additional factors can help you take a call on the fund you want to retain and the fund you want to exit okay now let's talk about the next strategy let's understand why you should not have multiple schemes from the same fund house portfolio overlap is a hidden risk in your portfolio but first why is that now two or more funds are said to have portfolio overlap when a significant percentage of their Holdings are the same so if your portfolio has funds with portfolio overlap you may have more than One Fund but that is not getting you the benefits of diversification now let's understand why portfolio Olaf happens there are two reasons for this first is the funds investment Universe now each scheme has a strictly defined Universe of stocks where it can invest for example large cap funds have to invest primarily in the top 100 stocks these restrictions can result in common stock holding across funds for example we looked at the top 10 stocks of the three largest actively managed large cap funds now as you can see on your screen these funds have significant overlaps in the top Holdings so there is no point in investing in the same stocks using different mutual funds now let's talk about the second reason AMCs often have investment philosophy that manifest in their funds so you may find the same stocks across its funds from different categories for example we looked at the same stocks in the different schemes of access mutual fund as you can see some scheme have significant overlap but it's not only access mutual funds Equity schemes that exhibit such an overlap we have found such overlaps in the schemes of other AMC's as well this happens because AMC's investment team and analysts follow the same investment philosophy they want to invest your money in the stocks that they feel are the best unfortunately we cannot entirely remove this problem of overlap but we can reduce it by diversifying across fund houses when the AMC changes the investment philosophy also changes so the change of portfolio overlap goes down now if you have multiple funds from the same fund house here is how to shortlist which one to keep and which one to exit first you can check the top Holdings if they are similar you can consider exiting them the second is checking the Benchmark if two schemes have similar benchmarks you must consider exiting one now let's talk about the next strategy you must exit sector and thematic funds as your name suggests sectoral and thematic funds invest in specific sectors and themes for instance consider an I.T fund it's a sectoral fund and it will primarily invest in companies related to the I.T sector on the other hand a consumption fund is a thematic fund it bets on companies that will profit from rising consumption levels this theme May in turn cover sectors like fmcg consumer discretionary Auto banking Etc so a thematic fund offer and has a broader mandate than a sectoral fund as an investor you should avoid investing in both sectoral and thematic funds as discussed sectoral funds have a narrower focus and if the sector fails to perform your returns could suffer and no sector remains at top forever and which changes economic Cycles where sectors do well and poorly take a look at the table on your screen it shows the performance of some sectors which are either Nifty 500 the green block show or performance over Nifty 500 and the red block show underperformance the same argument goes with thematic funds as well while they can be more Diversified than sectoral funds they still focus on themes and if this theme fails to perform your returns will suffer from time to time different themes emerge as the Market's favorite till the time a theme remains so the funds based on it will do well we have seen in the past how themes like housing in front ASG have gained prominence only to lose their significance soon see the chart on your screen it shows the annual returns of some thematic categories so different sector themes have outperformed the Nifty 500 during different periods the our performers keep changing for an average investor it would not be possible to predict which sector or theme would work in the future moreover you need not bother yourself with that as a mutual fund investor your fund manager has to deploy the money in the appropriate sector or theme so you can consider exiting sectoral and thematic funds in your portfolio and focused only on the Diversified ones we have a detailed video on this topic and the link is included in the description below the link is also available on the top right hand side of the screen this takes us to the next Point assessing the need for debt funds in your portfolio debt funds are needed for short-term goals or as debt component in your portfolio they provide the ease of rebalancing however often investors end up with more debt funds than are required for instance one can have overnight funds liquid funds short duration fund corporate bond funds and so on a combination of short and liquid duration funds is good enough for most purposes liquid funds are alternatives to your money you keep in your savings bank account and short-term debt funds on the other hand are alternated to fixed deposits debt funds high on credit risk or duration risk can be avoided altogether such funds tend to be far more volatile so you can conveniently ignore categories like credit response medium duration funds long duration funds and so on it's worth remembering that debt is for return of principle and not return on principle so don't chase returns in debt funds and don't go for too many debt funds in your portfolio now let's talk about the next strategy preparing your model portfolio like it or not the unfortunate fact is that many of us start investing without a financial plan in place so as we get some Surplus we invest it in a fund then we find another interesting fund when invest in that too over time we end up with many funds in our portfolio the solution is to go back to the drawing board so if you were to start investing now how would you do so which fund would you have as per your requirement maybe you will need to think hard and give it some of your precious time but it's worthwhile as you will get to understand your requirements better now here are some Basics you can use for the model portfolio first decide on your Equity debt and gold allocation you can have one debt and one gold fund within Equity decide how much would you like to have in large mid and small caps based on this you can pick funds from different categories now this is a basic structure and the final allocation should be based on how much risk you are willing to take now if you want to identify the red flags on your portfolio you can use the ET money portfolio health check it's free and it can be a good starting point for this cleanup exercise for you you can get your portfolio on the app in just one Tab and run the portfolio health check to see performance on some key parameters all right let me summarize what we have discussed in this video foreign [Music] your goals but it is equally important to track and manage your portfolio a lean portfolio can not only simplify the managing work but it also tends to be more rewarding to clean your portfolio you can do a number of things we discussed in this video and which are summarized in the table on your screen I hope you would have found the suggestions useful and you will apply the strategies to your portfolio all right with this we have come to the end of the video if you like the video do give it a thumbs up and share it with your friends and family we'll be back with an insightful video soon till then take care mutual fund Investments are subject to Market risks read all scheme related documents carefully

Channel: ET Money

Views: 106,574

Keywords: Mutual fund portfolio, Investment portfolio, Number of funds in Portfolio, Portfolio Returns, reduce funds in portfolio balanced portfolio, Re balance portfolio, How many should I have in my portfolio, how many funds in a portfolio, investing in mutual funds, Portfolio Allocation, Best mutual funds for portfolio 2023, how to choose funds for portfolio, how many mutual funds should you have, mutual fund diversification, building a good mutual funds portfolio

Id: bn4e3CdDIxo

Length: 18min 7sec (1087 seconds)

Published: Wed Jul 05 2023