Holding too many mutual funds? Expert suggests trimming smallcap-heavy portfolio

Building a mutual fund portfolio is not just about adding more schemes, it is about maintaining the right balance across categories to optimise returns while managing risk. Many investors, especially those chasing recent performance, tend to over-diversify their portfolios, which can dilute returns and increase complexity.

The same is the case with Sudhir, an investor and a viewer of The Money Show on ET Now, who sought advice on his mutual fund portfolio comprising multiple schemes across categories.

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His holdings include Bandhan Small Cap Fund, Edelweiss Midcap Fund, ICICI Prudential Focused Equity Fund, Motilal Oswal Large & Midcap Fund, Motilal Oswal Midcap Fund, Nippon India Large Cap Fund, Nippon India Small Cap Fund, Parag Parikh Flexi Cap Fund, along with exposure to a Silver ETF.

Responding to the query, Shweta Jain, a market expert, pointed out that the portfolio appears to be a classic case of over-diversification, with an excessive tilt towards smallcap funds. She noted that many investors tend to believe that the performance they have seen now will continue in future which is a big mistake.

She emphasised that the number of schemes and their allocation both matter. Holding too many funds, especially within the same category, reduces the effectiveness of diversification. Instead of improving returns, it often leads to overlapping portfolios and unnecessary complexity.

Jain said that allocations to each scheme is very important while making investments. She suggested rationalising the portfolio by reducing exposure to small-cap funds. Investors do not need to hold multiple smallcap schemes, and a more selective approach can help manage volatility better.

“They have multiple largecap, midcap schemes. Not required so many as such. Even if you are invested in many schemes, the diversification works against you because it is too diversified. It is over diversified as you correctly said. Smallcap as well you cannot get a piece of every smallcap that is there in the market. So, you have to pick and choose,” the expert said.

The portfolio holds thematic funds as well and an investment in silver ETF also which Jain believes is a long term investment not a thematic play and also recommended that one should not allocate more than 10% to 15% of your overall allocation should be in metals like gold and silver.

She recommended trimming positions in funds such as Bandhan Small Cap or Nippon India Small Cap to bring balance. “You can look at reducing some bit of the smallcap, be it Nippon or Bandhan if you are looking at.”

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On the largecap and midcap side, she highlighted duplication in holdings. With multiple schemes like Nippon India Large Cap, Motilal Oswal Large & Midcap, and Motilal Oswal Midcap, the portfolio carries overlapping exposure. She advised cutting down on some of these funds and sticking to one strong scheme in each category to streamline the portfolio.

Highlighting the risks of excessive smallcap exposure, Jain explained that while smallcap funds can deliver higher returns over time, they also come with significantly higher volatility. During market downturns, smallcap funds tend to fall more sharply and take longer to recover compared to large-cap funds, which can weigh on overall portfolio performance.

“Your largecap will recover much faster. Your smallcap will take much longer to recover. So your portfolio which could have looked, if you actually divide it into two parts, your large will look much better, even volatility-wise saying okay this is moving not beyond a particular point, but your smallcap will hopefully not see a free fall, but see a much larger fall and will take much longer to recover,”Jain said.

The key takeaway for investors is to avoid overloading portfolios with too many schemes or high-risk segments. A focused, well-balanced portfolio with appropriate allocation across large, mid, and small caps is more likely to deliver consistent outcomes over the long term.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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