Are you a mutual fund investor? Five steps to consolidate your portfolio

By Harsh Jain

As the year 2019 comes to an end and you are already planning your 2020 resolutions, especially those concerning finances, there are still a few things in the current year that need your utmost attention. One of those things is consolidating your mutual fund investment portfolio for the year 2020. Consolidation protects your portfolio from overdiversification and ensures you are always on track to achieve your financial objectives.

Let’s see how to do so:
Take hold of your inventory
The first thing to do is to take into account everything that you have. Consider all your mutual fund investments, see their track record, map them with the reason why you invested in them and then decide if they still hold any good. There could be cases where you may have invested in multiple mutual funds belonging to the same asset class based on recommendations.

Many investors have the misguided view that with each additional mutual fund to the portfolio, their risk is mitigated. However, evidence suggests that diversification works only till a certain point, beyond which your portfolio becomes overdiversified, fetching you suboptimal returns. Having too many funds also pose tracking issues, which is an extremely important activity post investing.

Optimal diversification is possible not by adding a large number of mutual funds to your portfolio but by adding a number of uncorrelated mutual funds to your portfolio. So, take a look at your mutual fund portfolio. See how the individual funds have performed and the performance of the entire portfolio as well. If a fund has been consistently giving poor returns, take the call to stop further investing in such a fund and switch to a better fund in the same category. Also, if you have been investing in regular plans based on recommendations, switch to the direct plan of the same mutual fund to save on commissions.

Plan as per your investor type
Now that you have reached the stage of consolidating your investments, you must have understood what kind of investor you are. Once you have identified your type, you must make investments accordingly. For example, you may be an aggressive investor or one with a good risk-appetite but a majority of your investments are inclined towards low-risk instruments or debt funds. This will lead to an underexposed portfolio and unrealised investment potential. So accordingly, increase the exposure of your portfolio to equity funds. The idea is to be invested across limited funds that provide the desired exposure and diversification simultaneously which are in alignment with your goals.

Well-researched fund selection
Once you have weeded out the underperformers and made space for new mutual funds, you need to act responsibly while selecting funds. Conduct comprehensive research and dig down deep into the fund’s performance, fund house stature, dividend pay-outs and other relevant factors before actually adding it to your portfolio. Do not fall for the recent trends of funds you are targeting. Look out for long-term trends like five to 10-year returns and then make an informed decision. There are plenty of educational resources available that can help you weigh the pros and cons and select a fund best suited to your financial objectives.

Redeeming and re-investing
Of the funds you are invested in, there would be some with a dividend plan and some with a growth plan. Depending upon your cash flow needs, you need to decide whether to redeem those funds or continue with the investments. You must take into account the exit load and other costs associated with the investments before redeeming. If the exit load is nil or ignorable, then you can consider redeeming the non-performers and re-invest the gained amount into better performing funds that fall in place with your goals and expectations.

Update your emergency fund
Now that the year has come to an end and you are headed towards a new one, there will be new opportunities, new trends, newer gains and new problems. It is therefore important to prepare yourself for financial exigencies, one of which is having an emergency fund. Emergency does not necessarily mean a medical emergency, there might be an unfortunate time when you lose your job or a recession hits your industry and you are forced to move to a lower paying profile or so. Hence, invest in your emergency fund and maintain it year by year.

The writer is co-founder and COO, Groww

Source: Financial Express