Managing a complex portfolio with numerous funds can feel overwhelming. While diversification is crucial, excessive diversification can backfire, leading to unnecessary fees, duplicated holdings, and difficulty in tracking performance. This article will guide you on strategically reducing the number of funds in your portfolio for better clarity, control, and potentially, improved returns.
Points to keep in mind
Complexity creep: Multiple funds with overlapping asset classes can lead to unintentional redundancy and hinder performance analysis.
Fee overload: Each fund carries an expense ratio, eating into your returns. By consolidating, you can minimise fees and maximise your profits.
Decision paralysis: Too many choices can create analysis paralysis, making it difficult to adjust allocations, and react to market changes.
Time commitment: Monitoring numerous funds demands significant time and effort. Streamlining your portfolio frees up time.
Before you begin
Review your investment goals: Clearly define your financial goals and associated timelines. This helps in asset allocation and eliminate funds that don’t align with your objectives.
Assess risk tolerance: Understand your comfort level with market fluctuations. Don’t hold onto excessively risky funds just for diversification.
Evaluate current portfolio: Analyse your existing funds for performance, overlap, fees, and alignment with your goals. Be ruthless in identifying redundant or underperforming funds.
Strategies
Eliminate small allocations:
Identify funds with less than five per cent of your portfolio value. These often add complexity.
Consider merging small allocations into broader, diversified funds that align with your goals.
Remember, exit loads and capital gains tax implications might exist, so factor them into your decision.
Consolidate overlapping funds:
Analyse your funds for similar investment objectives and asset classes. Eliminate duplicates, keeping the one with better performance, lower fees, or a more appealing track record.
Be mindful of sector-specific or thematic funds, as they can expose you to unnecessary concentration risk. Opt for broader funds offering more balanced diversification.
Prioritise low-cost index funds:
Passively managed index funds track a specific market index, offering broad diversification and typically lower expense ratios compared to actively managed funds.
Consider replacing actively managed funds with index funds in similar asset classes, especially if the active fund hasn’t consistently outperformed its benchmark.
Utilise target-date funds (TDFs):
TDFs are a “one-stop shop” for investors seeking a diversified, professionally managed portfolio. Their asset allocation automatically adjusts based on your target retirement date, becoming more conservative as you approach retirement.
TDFs are ideal for hands-off investors seeking simplicity and automatic rebalancing.
Seek professional advice:
If you’re unsure about streamlining your portfolio yourself, consider consulting a qualified financial advisor.
Additional tips
Rebalance regularly: Rebalance your portfolio periodically to maintain your desired asset allocation, especially after significant market movements.
Focus on long-term goals: Don’t react impulsively to market fluctuations. Stick to your investment strategy and avoid chasing short-term performance.
Continuously monitor: Regularly review your portfolio performance and adapt a strategy based on your evolving goals and the market environment.
Conclusion
Simplifying your portfolio by reducing the number of funds can create a more manageable, cost-effective, and potentially more profitable investment journey.
Remember, less is often more when it comes to managing your investments.
(Viral Bhatt is the Founder of Money Mantra, a personal finance solutions firm)
