How to build a lean, mean, profit-generating machine

Do you find yourself managing multiple mutual funds in your investment portfolio? It's pretty probable, as our recent analysis of around 48,000 investor portfolios revealed that approximately 38 per cent of them held more than 10 funds. That's nearly four out of 10 investors! A deeper analysis revealed that 97 per cent of individuals holding more than 10 funds typically possess over five equity funds , while around 30 per cent of them also have more than three debt funds . Interestingly, those initially having five equity funds often expand their portfolio to include 16 funds across various categories, even venturing into high-risk options. Similarly, individuals starting with three debt funds end up managing eight. To illustrate the extent of over-diversification, one portfolio even comprised a staggering 260 funds. But a cluttered portfolio has many disadvantages. For one, even you forget what funds you own, let alone highlighting the impossibility of tracking each fund. Second, it can impact the efficiency of your portfolio. Here's how: A portfolio of 24 funds The performance (and decline) of a cluttered portfolio Investment amount (Rs lakh) 24 Investment value (Rs lakh) 49.12 Returns (per cent p.a) 13.6 Cost (Expense ratio - per cent p.a) 0.78 No of stocks held (indirectly) 500+ No of debt instruments held (indirectly) 400+ Note: The number of funds for each category is based on what an average cluttered portfolio consisting only of direct plans looks like. Investment value, returns and cost are averages based on 10,000 simulations of a randomly selected fund portfolio. As seen in the above table, allocating Rs 14,000 monthly across 16 equity funds between January 1, 2014, to January 14, 2024, culminates in a portfolio having 500+ stocks. That's as good as investing in the entire BSE 500. Instead, one could simply opt for an index fund . Not only is it more straightforward, but it also proves to be cost-effective, boasting much lower expenses in comparison to the current portfolio's 0.78 per cent. Meanwhile, the Rs 6,000 monthly investment in eight debt funds from January 1, 2014, to January 14, 2024, means the investor is an owner of 400+ debt instruments.

This article was originally published on January 17, 2024.