How to reduce the number of funds in your portfolio?

How to reduce the number of funds in your portfolio?

Oftentimes, mutual fund portfolios can become very cluttered with all categories of mutual funds. Assessing your portfolio is a very important step for anyone who wishes to meet their financial goals through strategic mutual fund investments.

How to reduce the number of funds in your portfolio?

• Identify underperforming funds and exit them: Several investors invest in an underperforming fund based on their assessment of its future performance. However, when the fund does not offer high returns, it remain reluctant to exit it because of higher tax liabilities. Therefore, as a first step, you must identify the funds that are not performing as well as you expected them to and exit them. You can redirect that capital towards other investments that are performing well and can better help you meet your goals.
• If you are invested in a sectoral fund due to its short-term performance, exit it: Any investor who invests in a thematic or sectoral mutual fund scheme does so based on their assessment of how a particular sector would grow in the future. Certain sectoral funds perform well in the short term, only to underperform later. Sectoral funds are very volatile, and they offer limited diversification. You must, therefore, identify underperforming sectoral funds and exit them.
• Consider your risk appetite and accordingly exit/remain invested in your mid-cap and small-cap funds: You must properly analyze your risk appetite and conduct an analysis of the mid-cap and small-cap funds in which you are invested. Mid-cp and small-cap funds pose a moderate-to-high risk to investors and can be extremely volatile in nature. If you are willing to take extra risk for extra returns, you could consider allocating at most 30% of your investment portfolio to mid-cap and small-cap mutual funds.
• Assess your large-cap fund investments: If you have invested in several large-cap mutual fund schemes, you must assess their efficacy and performance too. Large-cap funds invest only in well-established companies with a large market cap. You can invest in flexi-cap funds to gain exposure to companies of all sizes.
• If you have too many debt funds in your portfolio, cut them down: A good balance of equity and debt securities is the characteristic feature of a balanced portfolio. You must look to strike this balance, however, if you are invested in too many debt mutual funds, you should consider exiting a few of them.
• Revisit your investment goals and realign your portfolio if needed: Investment goals are subject to change with time and the economic conditions of a country. You must, therefore, revisit these goals and check if your mutual fund investments align with them. Over time, the value of your financial goals might change, which might require you to realign your portfolio. 

Wrapping up

It’s important to have a few good mutual fund investments instead of cluttering your portfolio and over diversifying. This may lead to lower returns in the long run. Instead, you must note down your financial goals and analyze your risk appetite before strategically investing in a mutual fund scheme. You can also use an online SIP returns calculator when planning your mutual fund investments to meet your financial goals in a fixed period.