It never surprises me to see a bloated mutual fund portfolio, never! But each time I see one, I am driven to find out the reasons behind the mess. More importantly, to know what is the investor thinking? Recently, I came across another such portfolio.
Here’s how the mutual fund portfolio looks like.
(Click on the image to download it)
Here are some quick observations:
- The portfolio has 43 unique schemes, 63 if you count the variations
- Almost every category of funds finds a place in the portfolio; It looks like a collector’s edition.
- Investor is under the influence of recent past performers and star ratings for fund selection
- There is little clarity on when to invest and how much to invest. There are SIPs, STPs running along with Lumpsum investments.
- Attempt to switch to direct plans, wholesale. Basically, the same mess at a lower cost 😉
All things are created twice – first in the mind, then in reality. – adapted from Stephen Covey in The 7 Habits of Highly Successful People
There’s more to this mutual fund portfolio
As I drilled down deeper, I uncover some more portfolio insights.
All, except one, schemes have less than 10% weightage in the portfolio (even counting for growth & direct plans as one). The sad part is that no one scheme has the power to make any significant positive contribution to the portfolio.
The asset allocation is skewed. The investor, whose risk profile is aggressive, is probably not aware of either the risk profile or the asset allocation.
His exposure to equity can be upto 80% in the overall investment portfolio. The current overall portfolio has just half of it in equity and rest is non equity. Which is fine in case that helps him meet his goals, but not really sure if it is.
Several hybrid equity funds are present in the portfolio. There seems to be no other reason except past returns. Unknowingly, this has added more fixed income to the portfolio, messing the asset allocation further.
Now, 43 schemes is large by any stretch of imagination. There are 15 flexi/multicap funds in the portfolio. Of course, many large caps too. Not to forget the overkill in mid and small caps.
There is no thought process on what unique strategy any fund brings to the portfolio. That qualifies for over^(n) diversification or diworsification.
I recall my favourite statement.
The portfolio looks like an index fund at active management costs.
Unstructured thinking and the costs
Yes, that’s the reason any investor gets into the mess as above. One big downside of such an unstructured, bloated portfolio is that you may end up paying a lot more in transactions costs and taxes, thus further affecting your returns.
Not to mention the sheer number of decisions that you need to take in such a portfolio can freeze you. Now, if you are sheer lucky, it can still ride you, but isn’t that taking a lot of chances. (no pun intended)
Keep it simple
It doesn’t need rocket science to build your financial plan and a decent investment portfolio that will drive you towards your goals.
Here some steps that you can use.
- Decide your goals, what you want your money to do with you
- Take an assessment of where you stand today
- Understand the gap between today and the future needs (run some numbers)
- Align your asset allocation in line with your risk profile
- Don’t become too aggressive with your returns expectation; Instead, focus on saving more.
- Figure out the instruments (Equity MFs, Stocks, Debt MFs, FDs, EPF, PPF, etc) to suit this allocation and investment needs; Let them be unique to serve your needs. Don’t fall for the marketing.
- Review your plan and investments on an yearly basis to know that you are no track and make any adjustments.
Easier said than done. I know.
Yes, it can feel overwhelming at times and for some investors. Hence, if you can’t do it by yourself, it is worth it to go to an investment adviser and seek the right guidance.
Self or help – do you must!
What do you say?