These days, with so many mutual fund schemes available to us, we need to actively take the time to tidy up our portfolio in order to prevent any possible fund overlap.
Cleaning and decluttering our homes and workplaces is a custom as we celebrate Diwali, the festival of lights.
According to some, cleansing and cleaning provide room for light to enter, brightening the surroundings and bringing brightness and happiness.
You may also use this reasoning with your mutual fund portfolio. Your financial future may improve if you organize and simplify your portfolio. This will assist you in matching your investments to the desired financial outcomes.
There are several mutual fund schemes and other investment options available to us in this day and age.
Therefore, it is probable that your portfolio is congested. Additionally, there is a strong likelihood that the schemes you own may overlap in such a situation.
You may avoid this overlap and make sure that all of your assets are well-diversified to get the best possible returns by doing a portfolio cleaning exercise.
What does mutual fund overlap mean?
Holding schemes with comparable investment objectives or attributes, as well as potentially similar underlying portfolios, is known as overlapping.
Their weight in the scheme’s portfolio and sector composition may also overlap, in addition to the securities or stocks owned.
This might reduce the earnings you would get and subject you to concentration risk. A small number of companies, industries, and investing philosophies may dominate the results.
You see, diversity is the cornerstone of investment, but too much diversification without evaluating if it is really accomplishing its goal is counterproductive.
Therefore, appropriate diversification is required, rather than purchasing every plan available under the guise of diversity. The best method to get optimum diversification is to avoid mutual fund overlap as much as possible.
Cleaning up a portfolio
These days, you may check for mutual fund overlap in two or more schemes using online portfolio overlap screeners or tools.
But be careful not to make the same mistakes again. In other words, avoid contrasting a large-cap fund with a mid-cap fund or a small-cap fund.
In the same way, do not compare value funds with growth-oriented funds or flexi cap funds with multi-cap funds. These funds have distinct investing mandates.
Meaningful analysis requires a reasonable liking to compare, that is, comparing schemes with the corresponding categories and subcategories.
Appropriate action is necessary if the underlying portfolio overlap of two or more schemes in the same category and subcategory exceeds 60–55%.
By taking the following actions, you may prevent or reduce mutual fund overlap:
Cut down on many schemes from the same group and subgroup. Keep a maximum of one or two schemes per category.
Because they are likely to adopt similar investing methods and tactics across schemes, reduce the number of schemes from the same fund house or fund manager.
Redeem plans that align with your asset allocation strategy, financial objectives, risk tolerance, and overall investing aim.
It may not be possible to add much value to schemes that have a lot of overlap in their portfolio features, such as stocks, sectors, weights, etc.
Despite retaining them for a sufficient amount of time, reduce the number of schemes that have been continuously failing in comparison to their standards. Do not base your choice only on results that are six or one year.
Reduce the size of your portfolio to ten to fifteen of the best-performing and most appropriate schemes.
Holding mutual fund schemes that are distinctive and fit your investing wants or objectives should be your aim in this cleaning process.
This activity cannot be completed in silos; it must also be completed with an awareness of the market context.
For instance, a larger allocation to largecaps rather than smallcaps and midcaps makes appropriate at this time due to trade disputes, impending geopolitical tensions, macroeconomic uncertainties, and stretched valuations.
It is advised to avoid becoming too invested in smallcap and midcap equities since the margin of safety is uncomfortably low.
In conclusion
A prudent and methodical evaluation and cleaning, free from emotion, guarantees that your portfolio is appropriately rebalanced and reset according to the asset allocation that works best for you.
This might increase liquidity, risk-adjusted returns, and your chances of reaching your desired financial objectives.
Your whole investing portfolio, including equities, mutual funds, fixed income instruments, and more, should ideally fit on a single page. This may ease and lessen the strain of handling it.
Consider if you are “investing in accordance with your requirements and risk profile” or whether you are only adding to the clutter by expanding your portfolio on the fly.
Take deliberate action to create a prosperous financial future as you commemorate Diwali as a symbol of a fresh start.
Be a prudent investor and enter the next year with knowledge.
Have fun making investments.