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Optimizing the number of mutual fund schemes in your portfolios: how to do it?

Is there a ideal number of mutual fund schemes in a portfolio of investments? For more information on optimizing your mutual fund investment portfolio, click here.
Glide_invest_Mutual_fund_schemes_-How_to_optimize

Our financial planning journey involves planning for various financial goals. For each financial goal, our asset allocation requires us to diversify into various asset classes such as equity, fixed income, gold, real estate, etc. In the process, we end up investing in multiple mutual fund schemes. While reviewing the schemes, we may realise that some schemes are not performing as expected. So, we may end up investing in additional new mutual fund schemes. Soon we realise that we have too many mutual fund schemes in our investment portfolio. It may become overwhelming managing so many mutual fund schemes. This article will explain how we can optimise the number of mutual fund schemes in our investment portfolio.

Disadvantages of managing too many mutual fund schemes

Before we understand how to optimise the number of mutual fund schemes in our investment portfolio, let us look at some of the disadvantages of having too many mutual fund schemes in our investment portfolio.

Overlap of stocks

An investor may have invested in an active large-cap scheme, a Nifty 50 index fund, a sectoral IT fund, a thematic digitization fund, etc. Chances are high that all the above schemes will have IT stocks, such as TCS, Infosys, HCT Technologies, Wipro, etc., in their portfolio. So, with four different mutual fund schemes, the investor is getting exposure to the same four IT stocks. Similarly, there must be an overlap of other stocks in the investor’s portfolio. An overlap of stocks through different mutual fund schemes doesn't offer any additional benefit. If anything, it can harm the investor’s portfolio. For example, the IT sector is feeling the pinch of high-interest rates in the US; as a result, all IT stocks have corrected. So, if an investor has exposure to IT stocks through multiple schemes, all the schemes will bear the brunt of the fall in IT stocks.

Managing multiple schemes can be overwhelming

You need to review the performance of your mutual fund schemes regularly to check whether they are performing as expected. However, if you have too many mutual fund schemes in your investment portfolio, managing and reviewing them will be a time-consuming and overwhelming task. You can lose focus on managing them. Also, diversification beyond a certain point gives you little to no additional benefit.

Optimizing the number of mutual fund schemes in your portfolio

You can optimise the number of mutual fund schemes in your investment portfolio using the below strategies.

Invest on the basis of asset allocation

Asset allocation requires you to invest in various asset classes to diversify your risk. Investors prefer to diversify even within each asset class. In such a scenario, you can build your investment portfolio in the following manner:

    The above investment portfolio will consist of five mutual fund schemes, which are relatively easy to manage. We have not mentioned any debt fund as the debt portion may be covered with Employee Provident Fund (EPF) contributions for salaried people. You can also cover it with other debt instruments, such as the Public Provident Fund (PPF). However, if you want to invest in debt through a debt mutual fund, then that will add one more mutual fund scheme to the above portfolio.

    The portfolio will have some overlap, specifically in the equity segment. If you want to optimise the portfolio further, you may invest in a single large and mid-cap fund rather than investing in two separate funds. The other option is to invest separately in a large and mid-cap fund and drop the small-cap fund as it has a relatively high risk. You can consider these options based on what you are comfortable with.

    Performance of large and midcap funds

    Scheme nameAUM (Rs. crores)1-year3-years5-years
    Edelweiss Large and Mid Cap Fund1,5420.29%21.37%14.65%
    SBI Large & Midcap Fund8,0295.91%22.85%14.52%
    Quant Large and Mid Cap Fund3146.90%27.07%14.29%
    Tata Large & Mid Cap Fund3,3334.42%19.74%13.96%
    Sundaram Large and Mid Cap Fund5,089-1.64%17.60%13.37%

    Note: The above returns are as of 12th October 2022. The returns are for direct plans with growth option. The one-year returns are absolute. The three and five-year returns are CAGR. The funds have been ranked on 5-year returns performance.

    Build a simple passive investment portfolio

    In the above section, we saw how you could optimise your investment portfolio with five mutual fund schemes. But, the above portfolio has three active schemes in the large, mid, and small-cap categories. It may happen that the specific fund that you have selected is not performing as per your expectation or underperforming the benchmark. Also, many active fund managers fail to outperform the benchmark these days.

    In such a scenario, if you are happy with index returns, you may consider replacing the three active mutual fund schemes with the following index funds:

      The above passive portfolio will give you exposure to India’s top 500 companies with zero overlaps. Also, index funds will give you the benefit of low cost. You will need to add a gold fund and an international mutual fund scheme for asset allocation.

      If you want, you can replace the international fund also with an index fund such as a Nasdaq 100 Index Fund or an S&P 500 Index Fund. The above passive portfolio will be easy to manage and review.

      Invest in multi-cap schemes

      In the above section, we saw how you could build a passive equity portfolio of 3-4 mutual fund schemes to get exposure to India’s top 500 companies with zero overlaps. However, if you feel managing 3-4 mutual fund schemes in the equity segment is challenging, you can further optimise your investment portfolio with multi-cap funds.

      As per SEBI guidelines, a multi-cap fund has to invest a minimum 75% corpus in equities with 25% exposure to each category: large, mid, and small-cap stocks. Thus, a single multi-cap fund can give you exposure to large, mid, and small-cap stocks with a minimum of 25% exposure in each category.

      With multi-cap funds, you can optimise your overall investment portfolio to just three schemes along with asset allocation as follows:

        Performance of multi-cap funds

        Scheme nameAUM (Rs. crores)1-year3-years5-years
        Quant Active Fund3,0245.34%37.91%22.81%
        Mahindra Manulife Multi Cap Badhat Yojana1,426-1.29%26.14%16.25%
        Nippon India Multicap Fund13,5299.85%22.45%14.16%
        ICICI Prudential Multicap Fund6,7900.01%18.67%12.55%
        Sundaram Multi Cap Fund1,859-0.47%22.27%12.50%

        Note: The above returns are as of 12th October 2022. The returns are for direct plans with growth option. The one-year returns are absolute. The three and five-year returns are CAGR. The funds have been ranked on 5-year returns performance.

        Invest in hybrid schemes

        In the earlier sections, we discussed how you could invest in debt through EPF, PPF etc. However, if you want to invest in debt through a mutual fund, you can club it with your equity investment through a hybrid scheme. You can optimise your overall investment portfolio by investing in a hybrid scheme that gives you exposure to equity and fixed income through a single scheme.

        Within hybrid schemes, you have various sub-categories. Depending on the equity and debt allocation, these include:

          You also have an option to invest in a dynamic asset allocation fund / balanced advantage fund in which the equity and debt component is managed dynamically. Based on market opportunity, the fund manager manages the scheme dynamically.

          When it comes to precious metals, you may want to invest in silver and gold as a hedge against inflation. In this case, you can club them in a single scheme rather than invest in two separate schemes (one gold fund and one silver fund). For example:

            Consider investing in multi-asset class schemes

            You can optimise the number of mutual funds to just one for each financial goal with multi-asset class schemes. These schemes give you exposure to three different asset classes with a minimum 10% allocation to each asset class. Most multi-asset class schemes invest in equity, fixed income, and gold. Some schemes also invest in real estate investment trusts (REITs) and Infrastructure Investment Trusts (InvITs).

            Suppose you have two financial goals (building a fund for a child’s higher education and your retirement). You can have a simple two scheme investment portfolio with one multi-asset allocation fund for each financial goal.

            Multiple ways of optimizing the number of mutual fund schemes

            In this article, we have discussed various ways of optimising the number of mutual fund schemes in your investment portfolio. You can start with five mutual fund schemes (one each for large-caps, mid-caps, small-caps, international equity, and gold). However, if you are comfortable with index returns, you can replace the active equity funds with index funds. If managing three equity funds seems overwhelming, you can replace them with a single multi-cap fund. If managing multiple asset classes with multiple schemes is challenging, you can club two asset classes in a single scheme with a hybrid fund or three asset classes in a single scheme with a multi-asset class scheme. So, depending on your requirements, financial goals, and the number of schemes you are comfortable with, you can optimise your mutual fund portfolio.

            Investing in mutual funds with the Glide Invest App

            In this article, we have understood how to optimise the number of mutual fund schemes in your investment portfolio. You can partner with the Glide Invest App for your financial planning journey to get recommendations for the appropriate mutual fund schemes based on your risk profile. You will get advice on planning and systematically investing towards your financial goals

            With Glide Invest, you will get guidance for:

              To start investing towards your financial goals, download the Glide Invest App from Google Play Store or Apple App Store and get started.

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