Here's what you can do to avoid the complexity of having too many mutual fund schemes in your portfolio
Looking for advice on handling old mutual fund investments. While we enter into a fund, we do some research and then enter into the fund, continue the SIP for five to 10 years - but once it loses sheen and once you have better funds, how should we handle the old fund that we started to invest 10 years back? - Suryarao
A question must have popped up in the heads of people who have been investing for quite some time - "What should we do with our old mutual fund schemes?" This is a common problem amongst most investors. Over a period of time, investors end up with too many funds in their portfolios. First, let's understand why this happens.
In most cases, when we start investing, we search for the best fund and initiate the SIP. A few years later, we realise that the fund we have been investing in is no longer the best performer. For the same reason, we start investing in another scheme (the best performer at that time). The same thing keeps on repeating. This cycle is endless and leads to having too many funds in our portfolio, which is undesirable. Not only does it increase the complexity but often dilutes the overall portfolio return. So what should one do?
It is important to understand that no fund remains on the top always. Funds do undergo good as well as bad phases. Having said that, it is not important to always remain invested in the best-performing fund. What is more important is that your fund is giving reasonable returns, that is, it is able to beat or at least meet the category average returns.
What about underperformers?
Certainly, staying invested in an underperforming fund doesn't make sense. But one should ensure that the fund is actually an underperformer. Returning less than the best fund in the category is not underperformance and should not be the reason for not investing in it. Only when a fund has been continuously underperforming the category average for a long time (across different phases of the market), should you tag it as an underperformer and think of weeding it out.
In such a scenario, one can move their investment from the old fund to the new fund in one go. Since the money is already invested in equities, there is no need to average your purchase cost again by investing in a systematic manner. However, while doing so, one should mind the capital gains tax liability. Gains beyond Rs 1 lakh on selling equity funds after a year are taxed at 10 per cent.
Keeping this simple check of not adding a new mutual fund scheme just because of higher returns will prevent the problem of having too many schemes in your portfolio. Investors who are already struggling with too many investment schemes should work on consolidating their mutual fund portfolio. The best way for consolidating your portfolio is to weed out the underperformers and get out of the schemes which have a narrow investment mandate or hold less than 5 per cent of your portfolio.
Here's some guidance on how to consolidate your mutual fund portfolio.
Suggested read: When to exit a poorly performing fund?