'25 funds in my portfolio. Where do I even begin?'

Summary: Having too many funds in your portfolio might seem like the easy way to boost your portfolio’s returns, till they start weighing it down. This story provide a step-by-step guide to decluttering your mutual fund portfolio for maximum gains.

Twenty-five mutual funds. Some from his early investing days, some on a friend's recommendation, some picked up during NFO seasons. A reader wrote to us, not knowing which ones were working, which were duplicates or whether any of it had anything to do with what he actually needed.

This is not an unusual situation. Portfolios do not get cluttered overnight. They get cluttered one seemingly good idea at a time. And the result is almost always the same: more funds, but not more diversification. More complexity, but not more clarity.

Here is how to fix it.

Your goals come first, your funds second

The most common mistake investors make when decluttering is to start by looking at their funds.

Begin with your goals instead. What are you saving for? When will you need the money? How much risk can you absorb? Once you have answered these, you will have your target asset allocation, or the percentage of your money that should be in equity, debt and other assets.

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Only then should you open your portfolio statement.

Say you have two goals: retirement in 20 years, which needs 70 per cent of your savings and a car purchase in two years, which requires 30 per cent. If your portfolio has allocated 60 per cent to short-duration debt funds, it is badly misaligned, regardless of how good those individual funds are.

Hence, fix the allocation first. Everything else follows.

One fund can do several jobs

Once your target allocation is clear, map each fund to a goal.

An equity fund belongs to a long-term goal. A debt or liquid fund belongs to a short-term need. If a fund has no clear milestone, it probably does not belong in your portfolio.

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

One thing worth remembering: you do not need a separate fund for each goal. If you have 10 long-term goals, three well-chosen equity funds can serve all of them. What matters is not the number of funds but whether the total amount being invested is sufficient to meet all your goals on a cumulative basis.

If the allocation is under 5 per cent, it is probably not helping

Look at each fund as a share of your total portfolio. Any fund below 5 per cent is too small to meaningfully affect your returns, but it still adds complexity. One more statement to read, one more fund to track, one more tax calculation when you redeem.

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Remove such funds and consolidate into those that already have a meaningful place in your portfolio.

An exception: if you are actively building a position in a fund and it is currently below 5 per cent, you can hold on.

Exit the laggards, fix the overpriced

A bad fund is one that has consistently underperformed its benchmark over a long period. A common way to check is to look at the five-year daily rolling return. If a fund has been trailing its benchmark consistently over five years, it has had enough time to prove itself.

What should you do then? Exit.

Next, check whether you hold regular plans. A regular plan charges a higher expense ratio than a direct plan because it includes a commission paid to the distributor. That difference, often 0.5 to 1 per cent per year,  compounds quietly against you over time. If the underlying fund is good, switch to its direct plan. Same fund, lower cost.

Suggested read: Direct vs regular mutual funds: What's right for you?

Keep in mind that if you plan to redeem in a year or two, the savings from switching will probably be too small to matter. Here is where a question arises. If your hesitation to switch is purely taxation, then we advise you to switch since all you will be doing is delaying the payment of taxes, not avoid altogether. But if it is to avoid any hassle since only a short period of time is left, then maybe you can stick with the existing plan.

Sectoral funds: Useful only if used correctly

Sectoral and thematic funds, such as pharma, technology, infrastructure and consumption, carry risks that diversified funds do not. When a sector falls out of favour, there is nowhere to hide. A diversified fund can rotate away from an ailing sector. A sector fund cannot.

This does not mean you must avoid them. But two conditions must be met. First, they should never be part of your core holdings; they are additions, not foundations.

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Second, any allocation below 5 per cent is too small to move your returns but large enough to add clutter. Either size it up meaningfully or exit it entirely.

For larger portfolios, spread across fund houses

If your portfolio is large, say, above Rs 50 lakh, ensure your money is spread across at least four AMCs. Every fund house has its own investment style, and that style can go through extended rough patches. An AMC that follows a growth-oriented strategy, for instance, will see returns across most of its funds turn muted during periods when that style is out of favour, through no fault of the individual fund managers. Spreading across four or more AMCs ensures that no single house style drags your entire portfolio down at once.

A question to end with

But one question applies to every investor, regardless of portfolio size: Why is this fund here? If you cannot answer that for every fund you hold, you already know where to begin.

And if you want more guidance on whether to invest, exit or stick with a mutual fund, subscribe to Value Research Fund Advisor. Get personalised advice, real-time performance analysis and analyst-backed recommendations.

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This article was originally published on March 13, 2026.