Do you have a sound mutual fund portfolio?

ave a query regarding mutual funds? Maybe we can help.

Drop us a line and our mutual fund experts, Value Research, will do the needful.

I invested around Rs 50,000 in mutual funds.

Here is the list of my funds.

Tata Equity Opportunities, Tata Equity P/E Fund, Tata Infrastructure Fund, Tata Service Industries Fund, Chola Multi-Cap, Sundaram Mid Cap, DSPML TIGER Fund, HDFC Premier Multicap, IngVysya Mid Cap, UTI Dividend Yield Fund, Reliance Equity Opp. Fund, Reliance NRI Equity Fund, Sundaram SMILE and UTI Master Value, to name most of them.

I also have a reasonable investment in UTI RBP as well.

What do you think of my portfolio?

- Suresh

The one good thing about your existing portfolio is that it looks quite diversified across stocks and sectors.

But, on a closer look, your investments reflect a total lack of planning. You could have achieved the same kind of diversification with a lesser number of funds.

Take a look at our analysis of your portfolio.

Too many funds

You seem to be under the notion that a portfolio with a long list of funds translates into a good one. Not necessarily.

You own way too many funds (we have counted 14). It appears that you have been investing in every fund that comes your way.

There's no set rule as to how many funds one should have. But we feel it should be below 12, depending on the amount invested and the need for diversification across categories and schemes.

Too heavily tilted to equity

You have obviously thought of diversifying by buying as many funds as possible.

But the way you have invested does not indicate good diversification.

In your portfolio, out of the 14 funds you have mentioned, 13 are equity funds, which is far more than the required number.

Remember, the purpose of investing in more than one fund is to build a well-diversified portfolio.

You should have invested not only in equity funds (funds that invest in the shares of companies) but also debt funds (funds that invest in fixed return instruments like bonds) and maybe even cash funds (funds that invest in very short-term fixed return investments).

Or, at least invested in some balanced funds (funds that invest around 50% of their total portfolio in equity and the balance in debt).

Not convenient

Convenience is one of the advantages of mutual funds. By having such a big portfolio, you are definitely missing out on this benefit.

It is quite difficult to keep track of every fund in such a big portfolio. Rather evident from the fact that you could not even name all.

Monitoring a large number of funds is not an easy job. You may miss out on how your individual funds are doing vis-à-vis their peers.

Also, similar funds could lead to duplication of stocks.

Wrong selection of funds

Another worrisome factor about your portfolio is that majority of them are very young.

Only two of the funds that you have mentioned - UTI Master Value and UTI RBP - have a track record of more than three years.

Ideally, while selecting a fund, one should look at the track record of performance of the fund to see how it has performed over the bull (market moving upwards) and bear (market sentiment and prices dipping) phases of the stock markets.

However, since majority of your funds are quite new, therefore they are yet to pass through the different market cycles to prove their mettle. 

Clean up your portfolio

i. Start tracking the performance of all your funds regularly. Get rid of the non-performers. Do this over time and trim down your portfolio.

ii. Keep in mind the tax considerations. If you sell before a year of buying, you will have pay short-term capital gains. No long-term capital gains if you sell your equity funds after a year.

iii. Also check out the exit load since you may end up selling the units quite soon. These are fees that are charged when an investor sells the units of a mutual fund. They are based as a percentage of the Net Asset Value (the price of a unit of a fund).

The future?

For your future investments, we would advice you to pick funds that have a proven track record of performance.

When choosing a fund, you must look at the absolute returns as well as the benchmarked returns. Read How to compare mutual funds to get a clear understanding on how to look evaluate returns from a mutual fund.

Also look at how risky the fund is. Make sure that you have a mix of funds or else you may end up having funds that are only very aggressive. Read How risky is your fund to understand more about risk.

Look at the portfolio of your fund. Is it sticking to its investment philosophy. Read this piece Why you should watch over your mutual fund to get a good perspective.

To understand more about growth and dividend schemes and the tax impact, read The best mutual fund scheme for you.

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