Festive-season clean-up: how to declutter your mutual fund and stock portfolio
Alongside celebrations, India's festival season is also a time for clearing out cupboards, closets and homes. It may be a good time to turn your attention to something less visible but equally in need of a clean-up: your investment portfolio
Over time, investments can accumulate across mutual funds and direct stocks, often with overlapping holdings or little contribution to overall returns. Keeping track of them, and assessing how each fits into the larger portfolio, can become an increasingly complicated exercise.
A leaner portfolio makes it easier to monitor investments, assess performance and stay aligned with financial goals. Here is how to go about decluttering, starting with mutual funds and then moving to stocks.
Decluttering your mutual fund portfolio
Start by putting together a complete list of your investments. Your consolidated account statement (CAS) provides a consolidated view in a single document. You can download it from registrars CAMS and KFin Technologies, or through MF Central.
Next, revisit your asset allocation—the split between equity, debt and gold. “Check if a mutual fund investment has significantly distorted from your original asset allocation and therefore any trimming is needed there to re-balance the portfolio,” said Vishal Dhawan, founder of Plan Ahead Wealth Advisors
“Eight-ten mutual fund schemes should be adequate for most investors, depending on their goals and timelines,” Nisreen Mamaji, founder, MoneyWorks Financial Services.
A core-and-satellite structure can help keep the portfolio manageable. The core, comprising diversified equity or index funds, debt funds and gold, should be aligned with long- to medium-term goals. “You can keep a well-diversified core portfolio with funds that complement each other well and change only when a fund lags its category and benchmark for several quarters,” said Deepak Chhabria, chief executive officer and director at Axiom Financial Services.
The satellite portion is where clutter can build up. Sectoral and thematic funds, new fund offers (NFOs) and last year's top performers can all find their way into a portfolio. Keep this allocation small and be selective about what stays.
Schemes in the same category often hold the same stocks, especially in the large-cap category. A portfolio with too many equity funds “starts to resemble the broader market,” blunting its ability to outperform, said Ankur Punj, managing director and business head at Equirus Wealth. A Nifty 50 index fund can do that job at a lower cost.
Most Indian equity funds follow a growth-oriented investment style. A value or contra fund can provide some balance. Fund-house concentration is another factor to consider. “If you have too many funds from the same fund house, consider trimming exposure there, to mitigate any impact on your portfolio if a fund manager quits or the fund house runs into a period of underperformance due to its investment philosophy,” Chhabria added.
“Equity funds that make up less than 5% of the portfolio, and that you no longer add to, can also go. Even a strong run in it will barely move your overall returns,” said Amol Joshi, founder of Plan Rupee Investment Services.
Decluttering your stock portfolio
The same principle applies to direct equity holdings. Too many stocks can make it difficult to identify underperformers and assess what each holding contributes.
“The more holdings you have, the harder it is to spot the laggards, and beyond a point the portfolio simply tracks the market,” Punj said.
Start by getting a consolidated view of your holdings. These are available through your broker's app or website. If you have multiple demat accounts, you can download a consolidated account statement from the depositories—National Securities Depository Ltd or Central Depository Services (India) Ltd.
Looking at direct holdings alongside mutual fund investments can also reveal overlaps that may otherwise go unnoticed. For instance, holding HDFC Bank and ICICI Bank shares as a large part of your direct stock portfolio, while also owning three large-cap funds, could leave you with substantial exposure to the banking sector. Banks carry significant weight in frontline benchmark indices, and large-cap funds typically have considerable exposure to the segment.
Just like with mutual funds, it is important to keep track of your stock investments.
“Check for stocks with less than 1% weights and sell them if they are not adding any value to the overall portfolio. Review the thesis you had in mind for each stock and see if it still holds good. If you don’t recollect the thesis or bought it on just a tip, then sell it regardless of its performance. Use the freed-up cash to invest in a sounder stock or mutual fund. Weakening of a company’s fundamentals could be another reason to sell a stock,” said Aarati Krishnan, head of advisory at PrimeInvestor Financial Research.
Keep taxes in mind
A portfolio clean-up should also account for the tax implications of selling investments. Capital gains taxes may apply, so the order and timing of sales matter.
Prioritize selling loss-making investments first. If you end up booking some capital losses, it can be used later to offset capital gains and save on taxes. Remember, you can adjust short-term capital loss against both short term and long-term capital gains in any financial year. Long-term capital loss can be set off only against long-term gains.
If you are looking to sell an underperforming mutual fund or stock with little profits, use the ₹1.25 lakh exemption limit. When it comes to equities, long-term capital gains up to ₹1.25 lakh are tax-exempt each financial year. Holding period of more than 12 months is required for an equity investment to get long-term capital gains treatment.
“You can plan some tranche of selling before 31 March and some afterwards as new financial year begins from 1 April. This way you can use the tax-exemption limit twice in the same calendar year,” said Harshal Bhuta, co-founder and country co-head, international tax & FEMA, Ascentium India.