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How can I reduce the number of funds in my portfolio?

Dhirendra Kumar explains the filtering mechanism that can be used to consolidate your mutual fund portfolio

I have been investing in equity mutual funds from the last six years and the returns have been fairly good. Currently, I have around 12 funds in my portfolio. But I want to reduce it to four funds. How can I do that?
- Dhiwesh

It is a good idea to consolidate your portfolio to four to five funds because having too many funds in your portfolio actually nullifies the whole objective. You end up having an index type portfolio and bear the cost of an actively managed fund. Diversification is good but too much of a good thing may not be good.

I think you should just devise two to three principles. One is remove the funds from your portfolio which have narrow universe like large-cap or sectoral funds. Knock off any sectoral or large cap that you have. Give the fund manager flexibility and have a conscious deliberate allocation to small and mid caps. Small and mid caps can be extremely extremely disappointing as well as extremely rewarding and need quite a bit of time to materialise. In your six years of investing you have enough experience to acknowledge or appreciate that.

There are two more things that should be in your filtering mechanism. One is the fund should have done well in a rising market, that is, it should have given more returns than the market. And the other is that it should have fallen less in a falling market or a year like 2008. It would also fall but should have fallen less than the market. If you have an experience of six years, you can very well figure that out. So choose funds which fulfill this criteria.

Besides this, there is one more thing that you should use as a rider. Make sure that the fund manager who is responsible for the performance is still there.