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Should I consolidate my portfolio of mutual funds?

Dhirendra Kumar explains the importance of consolidating your portfolio

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I have invested in 22 mutual fund schemes over the past two to three years. I'm now confused whether to retain or consolidate them. What should I do?
- Aayush

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Reducing your portfolio to two to three funds will be good enough. Most financial objectives of investing for the long term in equity can be achieved with that. The disadvantage of investing in too many funds is that you end up paying the cost of actively managed funds, while by virtue of owning 22 funds of varied kinds what you actually have is an index fund. Thus, too much diversification may not be a good thing.

Also, psychology plays a role here. When you invest in 22 funds, you are a little bit interested in all of them, but not meaningfully interested in any of them. Thereby the interest impact will be low. A 10 per cent loss or profit will not bother you much because it will have a minute effect on your overall portfolio. On the other hand, when you have two or three funds you tend to worry about it.

In order to consolidate your funds, find the three best multi-cap funds amongst your current set of 22 and make sure that you are able to redeem the rest and consolidate these in the chosen ones.

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