When Should You Reduce Equity Funds in Your Portfolio?

Do you have too many equity funds in your portfolio? Are you finding it difficult to manage these equity mutual fund schemes? You could consider exiting equity funds that have consistently underperformed the benchmark and peers over time. Moreover, you must check if your equity investments match your investment objectives and risk tolerance. When should you reduce equity funds in your portfolio?

Should you diversify your portfolio?

It would be great if you diversified the equity portfolio for risk-adjusted returns by spreading your investment in stocks across sectors and different industries. However, many investors diversify their portfolios by investing in several equity funds. It doesn’t serve a purpose as adding mutual funds beyond a point doesn’t help diversification. 

Many people find it challenging to pick the ideal number of equity funds for their portfolios. However, there is no perfect number of equity funds such as a range of 5-10 funds. It helps if you pick fewer equity funds for a small-size portfolio and more funds for a large-sized portfolio. 

Remove equity funds with low weightage in your portfolio

You may have invested in equity funds many years ago, or you could have stopped your SIPs in some equity mutual funds. These funds may have a 6%-8% weightage in your portfolio. It helps if you redeem these investments as quickly as possible.

It will help to redeem equity funds with a small allocation in your portfolio as they don’t impact portfolio performance. Moreover, even if these funds are doing well, it still makes sense to get rid of them and manage your portfolio in a better way. 

Get rid of underperforming equity funds

You must weed out equity funds that have continuously underperformed peers and benchmark over time from your portfolio. It helps if you track the performance of your equity funds and get rid of funds that have underperformed consistently over three to four quarters. 

You must exit any equity fund that doesn’t match your risk profile. For instance, you may have invested in the sector or thematic funds suitable for market-savvy investors. These funds invest in one sector or according to a theme and may not match your risk tolerance. 

Don’t invest in multiple mid-cap and small-cap funds

You must invest in mid-cap and small-cap stocks only if they match your risk profile. Moreover, you must not add many of these funds to your portfolio as they are highly volatile in the short term. It helps if you focus on only one or two equity funds in the mid-cap and small-cap space. 

You must consider diversifying your portfolio with large-cap funds, ELSS and Index Funds that can stabilise your portfolio. It forms part of your core portfolio, around 70%-75% of your portfolio. You could invest in mid-cap and small-cap funds as part of your satellite portfolio. 

You must consider capital gains tax when redeeming your equity mutual funds. Moreover, if you have too many equity funds, you must consider a systematic clean-up of your portfolio to minimise the impact of exit loads. In a nutshell, you must exit underperforming equity funds and focus on appropriate investments to attain your financial goals. 

For any clarifications/feedback on the topic, don’t hesitate to get in touch with the writer at cleyon.dsouza@cleartax.in