By now, mutual funds have established themselves as the go-to asset class to make wealth for many life targets. Helping you diversify your portfolio, they aid you accomplish many quick and extended-term targets with ease.
However, normally investors fail to get the preferred returns from their mutual fund investments, and one of the motives behind this is the holding of also several funds.
The Problem of Plenty
It’s incredibly popular for investors to hold a number of funds of related kinds in their portfolios. They do it for the sake of diversification, believing that it will down threat and improve returns. However, more normally than not, the opposite takes place.
When you hold also several funds of related nature with core fundamentals remaining the similar, it dilutes returns. The losses and gains are cancelled out. The income from higher performing schemes get compromised by the losses from low-performing ones.
Also, every single equity fund that you personal invests in at least 50 to 60 stocks. If you hold 8 to 10 equity funds, you invest in 400 to 600 stocks or even more. In such a situation, your portfolio, in reality, would act as a tracker fund. It’s difficult to create alpha if you finish up owning the complete industry.
If you want to do so, it is far better to invest in an index fund. You can not only save on expenses but also get more than shocks connected to your fund’s underperformance.
Difficult to Monitor
There’s a further trouble when you finish up holding also several funds in your portfolio. When you do so, it becomes bloated and complicated to monitor. It requires more time than necessary, and you might not be considerably inclined to evaluation your portfolio even as soon as a year.
If you are not sure how considerably every single element is performing, then there are probabilities of chronic underperformers escaping the scrutiny net and dragging down returns.
The Way to Do It
So, what’s the suitable method towards diversifying devoid of holding also several funds in your portfolio? You have to focus on the suitable fund in the suitable proportion. At the similar time, you have to routinely rebalance your portfolio to determine laggards and weed them out.
The suitable asset allocation would not only avoid you from going overboard but also avoid the gains from eroding in case markets nosedive. For instance, for the duration of the industry carnage in March 2020, when equity funds wilted below mass selloffs, portfolios that had been exposed to gold and debt remained resilient.
The Number of Funds to Hold
So, how several funds ought to you hold in your portfolio? When it comes to equity funds, investors are spoilt for option. With big-cap, mid-cap, multi-cap and tiny-cap funds to opt for from, the option can be overwhelming.
However, at any offered time, 3 or 4 funds ought to do the job for you. A couple of multi-cap funds, along with a big and mid-cap fund, ought to do the job for you. If you have a higher-threat appetite, then you can opt for a tiny-cap fund. Don’t stretch additional.
Also, make sure that the funds you opt for do not finish up holding the similar stocks as overlapping will not do any great. In the case of debt funds, liquid funds ought to be a component of your portfolio for constructing an emergency corpus.
Summing it Up
As evident, by limiting the quantity of funds in your portfolio, you accomplish diversification and guarantee optimum returns. Regardless of the size, 3 to 4 funds are adequate to make a effectively-rounded portfolio to improve your riches.
To stay away from overlapping, analyse the funds’ portfolios minutely. Have a close look at the composition of funds and use on line tools to figure out the extent of overlap.
(By Rahul Jain, EVP & Head, Edelweiss Personal Wealth)