Too many mutual funds? Here's how to declutter your portfolio

Over a period of time, I have added too many mutual funds, more than 40 in my portfolio by following the VR fund recommendations. Please suggest a strategy to declutter the portfolio to reduce the number of funds.

There's a well-known saying, "Don't put all your eggs in one basket." This tidbit of wisdom applies to investing too. After all, if you place all your faith in a single fund, you are more likely to wipe out your wealth than if you spread your investments. Hence, diversification is essential for preserving your capital.

Many investors follow this logic assuming that more mutual funds means better risk management. But when there are too many funds in your portfolio, tracking them all can become difficult. This leads to portfolio fatigue and by decluttering your investments, you can stay on top of your holdings.

You can start by churning the long-term underperformers. However, this should be a standard exercise done irrespective of having these many funds. So, evaluate each fund's long-term performance against its category average and benchmark performance. Exit the ones that have done poorly consistently.

Lastly, you can exit investments that do not impact your portfolio due to low allocation. An allocation of at least 5% should be meaningful. So, you can sell funds that make up less than that. Any period of good performance wouldn't drive up your returns, since exposure to those funds is negligible.

Conclusion
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This article was originally published on August 21, 2024.