Five Steps To Consolidate Your Scattered Mutual Fund Portfolio
Many of these investors have unknowingly suffered suboptimal returns for years on end, and are a bit at sea when it comes to how to go about cleaning things up. Typically, we see such portfolios prevalent within the community of unadvised retail investors who tend to buy Mutual Fund schemes on a whim, without giving a proper thought to whether it fits in within the framework of their goals, risk tolerance and return objectives. If all this sounds familiar to you, and you’d prefer the DIY route to begin consolidating things, here are 5 steps for you to take.
Map your Goals & ‘split the pie’
Mundane as it may seem, the act of mapping your future goals to your current investments and future inflows is a critical one. Sit down and define your objectives first – with clearly stated inflation adjusted future amounts and goal dates. Some objectives could be – your comfortable retirement, a great higher education for your child, or simply upgrading to a new car. Make sure you do a basic calculation to decide just what portion of your current portfolio & future savings are to be aligned to what goal – the so-called ‘splitting of the pie’, so to speak. For instance, you may decide to earmark 15 lakhs of lump sum and 20,000 per month of your SIP’s to your retirement, another 4 lakhs of lump sum and 5,000 per month to your daughter’s education, and so on and so forth.
Decide on your Asset-Allocation
If you’ve been piling on NFO upon NFO over the years, chances are that you’ve given precious little though to your ideal asset allocation, or split between your equity oriented and debt oriented funds. For arriving at the figure that works best for you, you’ve got two options. You could either derive your asset allocation based on your financial goals from step 1, or you can do so based on your risk profile, liquidity constraints and time horizon. For any moneys (and future inflows such as SIP’s) that are earmarked for goals that are 7 or more years away, you should choose equity oriented funds. For goals that are 3 to 7 years away, choose hybrid funds, and for moneys and inflows that will be consumed before 3 years, go for debt oriented funds.
Fund Selection: Do your Research
Armed with your target asset allocation, you’ll now need to decide on fund categories in a top down manner. This step can be slightly confusing for some people, as they do not fully understand the risk-reward scenarios associated with each type of mutual fund. Most investors would be better off sticking to diversified or multi-cap equity funds with their equity allocation – savvier investors may choose to go for mid cap funds, thematic funds, or sectoral funds as well. Fund selection can be a tricky affair, as the allurement of short term past returns may drive investors to deploy moneys into funds that do not have proven track records across market cycles. Select funds based on their long term (10 year+) track records, fund manager and fund house pedigree, and overall investment strategy. For best results, restrict your overall portfolio to 5-10 funds across all categories, even if it means letting go of several of your prized acquisitions!
Catharsis: Redeem and Re-invest
This is the moment when you’ll need to bite the bullet and take concrete action. During this phase, make sure you account for load-free units and factor in tax efficiency. You may need to stagger your exits over a few months to circumvent exit loads and capital gains taxes, especially if you’ve got SIP’s running – since each SIP purchase counts as a fresh tranche. On the other hand, you may want to just redeem your non-performers anyhow, if the exit costs associated with them are inconsequential. Being decisive, organized and action-oriented during this phase is key.
Final Word: Make further investments only into your current set of funds
To prevent the same situation from recurring, make sure you resolutely stick to your selected set of funds, even for investing future surpluses. If you’re jittery about deploying lump sums into equities when market valuations appear overstretched, use the STP (Systematic Transfer Plan) route to make fresh investments into your presently owned funds. Keep your portfolio neat and organized, and you’ll be surprised with the results that accrue from this simple act over the long term.
