The problem with owning 13 mutual funds to reach Rs 4.67 crore goal

Building a long-term wealth corpus through mutual funds is not just about investing regularly; it is also about ensuring that the portfolio remains efficient, focused, and aligned with an investor's financial goals. While diversification is important, holding too many mutual fund schemes can often lead to overlap, making portfolio management more complicated without necessarily improving returns.

A 40-year-old investor with a high-risk appetite and a 20-year investment horizon reached out to ETMutualFunds and sought advice of targeting a retirement corpus of around Rs 4.67 crore through monthly mutual fund investments of Rs 45,000. While the portfolio has delivered satisfactory returns over the past few years, the investor sought expert advice on whether the current allocation needs rebalancing to improve long-term wealth creation.

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The investor currently holds 13 mutual fund schemes across index funds, flexi-cap funds, large & mid-cap funds, small-cap funds, hybrid funds, multi-asset funds, gold funds, silver funds, and a sectoral banking fund.

Expert Anup Bhaiya, Founder Money Honey, Wealth Services Ltd analysed the portfolio and told ETMutualFunds that the portfolio is diversified but suffers from excessive fragmentation and overlapping investment styles, which could limit its ability to generate superior returns over the long run.

The expert said that the investor has built a foundation that is certainly diversified. However, the portfolio currently suffers from "Over-Fragmentation" and "Style Overlap."

Too many funds can dilute returns

As the investor has invested in 13 mutual funds , the expert said that holding 13 schemes for a monthly investment of Rs 45,000 is excessive and may lead to what is often referred to as "closet indexing" — a situation where a portfolio ends up mirroring the broader market rather than outperforming it.

"When a portfolio is spread this thin, you end up with "closet indexing"—where your performance will likely mirror the broader market average after accounting for the various expense ratios, rather than outperforming it," the expert said.

Can annual step-ups help?

The investor has projected a corpus of around Rs 4.67 crore over 20 years assuming a 13% annualised return and no increase in SIP contributions. However, the expert said that implementing a 5% annual step-up in SIPs could significantly improve outcomes.

According to the calculations, the projected corpus could rise to nearly Rs 6.5 crore to Rs 7 crore over the same period if the annual step-up is consistently maintained while earning similar returns.

The expert also said that reducing the number of schemes from 13 to around six or seven high-conviction funds can help. “With 13 funds, rebalancing is a logistical nightmare. By consolidating to 6–7 funds, you can rebalance your equity-to-debt ratio once a year with minimal tax impact,” the expert said.

Apart from improving portfolio focus, consolidation would make annual rebalancing easier and reduce administrative complexity.

The expert also pointed out that managing a large number of schemes often results in frequent portfolio adjustments, which can trigger unnecessary capital gains taxes and reduce the benefits of compounding.

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Reduce exposure to defensive assets

One of the key observations was the portfolio's high allocation to gold and silver funds. The investor currently allocates Rs 16,000 every month to gold and silver-related investments, accounting for more than one-third of the monthly SIP amount.

For an investor with a high-risk profile and a 20-year horizon, the expert believes this allocation is excessive. "Gold and silver serve as portfolio diversifiers and hedges, but they are not primary wealth creators over long periods. A 27% allocation to precious metals may act as a drag on overall portfolio growth," the expert said.

Instead, the expert suggested reducing the combined allocation to gold and silver to around 12% of the portfolio while maintaining exposure as an insurance component.

The expert said the current 27% allocation to Gold and Silver is defensive and lacks the growth profile required for an aggressive 20-year equity journey and he further said that we are capping this at approximately 12% (Rs 5,000 of the Rs 40,000 total) to maintain a hedge without dragging down the portfolio's net growth.

Shift focus towards growth-oriented strategies

The expert said that moving away from categories such as multi-asset and aggressive hybrid funds, arguing that these products are designed to reduce volatility rather than maximise long-term growth.

For investors with a 20-year horizon and high risk tolerance, a greater allocation towards pure equity strategies could potentially generate better outcomes. “For a 20-year horizon, we are excluding Multi-Asset and Aggressive Hybrid categories. These are "cushion" products that lower overall portfolio beta; for a high-risk profile over two decades, pure equity growth is superior.”

The recommendation also included increasing exposure to factor-based investing through momentum-oriented strategies. According to the expert, momentum investing has historically outperformed broader market indices during favourable market phases and could provide an additional growth driver for long-term investors.

“We are introducing the Bandhan Nifty 200 Momentum 30 Index Fund. Momentum strategies historically outperform broad-market indices in trending markets, providing the necessary "growth kicker" for long-term compounding,” the expert said.

Suggested portfolio structure

The expert Anup Bhaiya, said that restructuring focuses on a concentrated portfolio comprising flexi-cap, large & mid-cap, small-cap, momentum-based index strategies, and a limited allocation to precious metals. He further said that we are standardizing the allocation to Rs 7,000 per strategy for growth funds and Rs 5,000 for the commodity hedge.

The expert further said that Rs 7,000 can be invested in Nifty 200 Momentum 30 Index Fund, Rs 7,000 each in small cap, multi cap, flexi cap, and consumption fund and Rs 5,000 can be invested in gold and silver index fund. The objective is to create a simpler portfolio with stronger growth potential while maintaining adequate diversification.

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Benefits from proposed changes

The expert said that by removing redundant large-cap indices and defensive hybrid funds, we increase the portfolio’s sensitivity to equity growth, rebalancing is now a streamlined process involving only 6 schemes, ensuring maximum tax efficiency and lastly, the Gold and Silver allocation is now a structured "insurance" component rather than a dominant asset class, keeping the focus squarely on equity wealth creation.

For investors with long investment horizons and high risk tolerance, the expert concluded that portfolio simplicity can often be more effective than owning a large number of funds.

"A portfolio should not just be diversified; it should be purposeful. The goal is to ensure every scheme has a clear role in wealth creation rather than merely adding complexity," the expert said.

(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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