“Mutual Fund sahi hai”, we’ve all heard it. And many investors take this advice very seriously. Every new recommendation, every trending category, every top-performing fund gets added to the portfolio. Over time, what starts as smart investing turns into a crowded mess of mutual funds.
The problem? More funds don’t always mean more diversification.
Most investors don't know that many mutual funds are actually buying into the same set of stocks or sectors. Large-cap funds rush after the same heavyweight companies. Sectoral exposure is repetitive across schemes. Thus, even if your portfolio contains 15 or 20 funds, you are probably still overexposed to the same IT, banking, or metal stocks.
This creates what experts describe as "pseudo-diversity". On paper, it looks diversified. In reality, it's not.
And when those common stocks or sectors fall, several funds bleed together. That’s the time the investors go into a complete panic: Why does everything in my portfolio show red colors together?
If this sounds like something you have experienced, well, clarity is the first step. Upload your portfolio on to any online mutual fund portfolio analysis tool. These clearly show where your investments are overlapping-across sectors, stocks, and categories of funds.
You'll quickly see if too much of your money is parked in the same themes, even through different funds.
Once you recognize the problem, it's time to clean up.
Shortlist one or two funds from each category-large cap, mid cap, and small cap-which have been consistently performing well across market cycles. Consistency matters more than one-year returns. The rest can go.
Also, remember one unwritten rule which many investors forget: do not pick all your funds from the same AMC. Different fund houses follow different strategies. Sticking to just one increases the risk of repeating the same mistakes.
But selling mutual funds does not involve losing money through taxes. In India, there is a mighty utility — the Long Term Capital Gains Tax Exemption of ₹1.25 Lakh in Equities and Equity Funds.
This exemption window will let you offload your fund if you've owned it for over a year. Distribute your exits over several financial years, exit some funds this year and some at a later date, and thus get your taxes minimized.
Another way to withdraw money is through a Systematic Withdrawal Plan or SWP. If your total long-term gains in a financial year remain below ₹1.25 lakh, you do not have to pay taxes.
“If a mutual fund is underperforming, don’t think twice. Sell it. Hope is not an investment strategy. It’s better to get out now rather than see it unravel before your very eyes.”
A portfolio that has too many funds can harm your returns quietly. Getting rid of unnecessary funds the right way can make your portfolio stronger, leaner, and more efficient.
