I have been investing in mutual funds since 2011. I had far too many funds (14, to be precise) and there was too much overlap as well. Further, a few of them had not been doing too well recently (HDFC portfolio). As such, taking advantage of the recent run-up in the market, I sold my portfolio with a view to restructure and re-deploy. Having become a bit wiser (if I may say so), I want to restrict myself to the following funds: a short-term fund, an aggressive hybrid, a large-cap and 2-3 multi-cap funds. A maximum of six funds is what I want to hold. What is your advice on the best way to re-deploy my sale proceeds?
There is no golden rule on how many funds you need to have in your portfolio. If you have been investing through, say, an offline intermediary (broker) or in direct plans individually with different fund houses, it could be a challenge to keep the paperwork in order as well as get a consolidated view on the performance of your holdings at one point in time. This problem is solved, to a good extent, when you use online brokers or aggregator platforms, which may give you the room to hold more funds and still be in control.
Your point on overlap of holdings is well-taken. For an institutional investor like a mutual fund house, the universe of investible stocks in India itself could be limited to the top 500 stocks by market capitalisation, or even lower. With plenty of funds chasing limited stocks, overlaps cannot be avoided. The universe also tends to get narrower as the fund size (AUM) increases beyond a certain level.
When the fund size becomes large, taking a desired level of exposure or even cutting it, as well as impact cost of executing transactions become difficult, especially with mid- and small-cap stocks. Hence, the choice of stocks could become more restricted for such funds.
Deciding on the ideal number of funds to hold, and at the same time avoiding overlaps in your portfolio, is thus easier said than done.
We are unable to comment on your decision to restructure and redeploy, in the absence of details on the fund holdings, the investment vs market value, and your return experience. Since you have already done it and are ready to begin on a clean slate, here are some points to consider.
Your choice of category of funds is a combination of your risk appetite and your time horizon. Your selection shows a moderate risk appetite.
If you have any near-term goals, short-duration funds are good to consider as they are not subject to as much interest rate risk as funds of longer duration. However, you need to hold them for at least three years to get the benefit of long-term capital gains when you sell it. With a consistent track record of returns and low credit risk, IDFC Bond Fund – Short Term Plan is a good one in this category.
You can go for Canara Robeco Equity Hybrid or SBI Equity Hybrid in the aggressive hybrid category, and Axis Bluechip or Mirae Asset Large Cap in the large-cap category. Low -ost index funds such as UTI Nifty Index or HDFC Index Fund – Sensex Plan can also be a good alternative to large-cap funds.
In the multi-cap category, fund houses are in the process of rejigging their investment styles to either call themselves flexi-cap funds (that can invest across large-, mid- and small-cap stocks in any proportion) or multi-cap funds (with at least 25 per cent exposure to each of the above categories. Kotak Standard Multicap and Parag Parikh Long Term Equity, both of which will now be flexi-cap funds, are good choices.
For equity funds, a time horizon of at least 7-10 years is recommended.
All actively managed equity and hybrid funds recommended here are rated five-star under BusinessLine Portfolio Star Track MF Ratings. IDFC Bond Fund – Short Term Plan is rated four-star.
Send your queries to firstname.lastname@example.org