How to consolidate your mutual fund portfolio? | Value Research Let’s learn the proper way to go about reducing the number of funds in your portfolio
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How to consolidate your mutual fund portfolio?

Let's learn the proper way to go about reducing the number of funds in your portfolio

Over a long period, investors tend to broaden their investments and end up investing in too many funds or make purchases that don't tend to perform well. At a later date, while consolidating their portfolios, they often come up with a question as to whether they should move from one fund to another in a lump sum or follow the staggered approach through SIP/STP.

The main idea of investing through a staggered approach is that you average the purchase cost and reduce the risk of investing all your money when the market is high. When you use this approach, you'll be buying at times when the market is up and down, therefore averaging the cost. So, you can use the lump sum method if you've invested initially by SIP. You've already utilised the benefit of averaging the cost while purchasing. So, while consolidating, you can simply use the lump sum method.

In the process of consolidating your portfolio, you can weed out the poorly performing funds and the funds that have a narrow mandate. In fact, this can be an opportune time to make such shifts in your portfolio since the markets are in a depressed state. Although you would be moving your money from one fund to another, the realised gains on redeeming the old investment are liable to capital gains tax. Considering that markets are in a depressed state, the tax liability will likely be low.

However, ensure that you're actually exiting a poorly performing fund, as there is a difference between a falling fund and an underperforming fund. Overall, the markets have fallen recently and the recent returns generated by most of the funds are negative. But that doesn't necessarily mean that they are poor performers. There can be a possibility that your fund is providing negative returns, but it might be beating its benchmark and its peers across the category. So actually, it is performing well. Further, one should not just look at the recent returns, performance over a long period of time must be considered.

So, while consolidating, investors should avoid only those funds that aren't performing well against their peers or have performed badly in the long run. Learn when to exit a poorly performing fund.

Suggested watch: How to rebalance a portfolio in the case of SIPs?


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