Consolidating Your Portfolio

I am sure everyone of you at some point have wondered why you have so many funds in your portfolio. I am one of them too. If you have wanted to consolidate your funds into fewer funds in fewer categories, this post should help you get there.

There could be many reasons for your bloated portfolio. May be some funds performed better at some point but not anymore and so you stopped investing in it and started another one. Or perhaps you created multiple folios in the same fund by mistake because you did not select a folio number. May be some one advised or you found a new “hot” fund. Perhaps you wanted to venture into difference categories like mid-cap, small-cap, multi-cap, large-cap, thematic funds. Or it could be because you wanted more diversification in each fund category so you invested in multiple fund houses. No matter what the original thought process was, now you are left with a whole bunch of stale funds and you don’t know what to do.

In some cases it might be beneficiary or easier to have multiple funds or folios. So first understand why you have so many funds. Were you segregating based on your goals? If you have lots of goals then may be it makes sense that you have lots of funds and folios so you can track them separately. Or if you are like me, you might be maintaining multiple folios for tax efficiency (more on this in another post). After having figured out those objectives, if you still need to consolidate, here is how I would go about it.

Find the right number

First figure out the right number of funds and folios you will need in your portfolio. This depends on your goals and fund categories (mid-cap, multi-cap, short-term, liquid-funds etc). If you ask me, I would just stick with 2-4 categories at most. Don’t go for exotic diversification. Personally, I suggest the following in that order — multi-cap (equity), ultra-short term (debt), mid-cap (equity), liquid funds (debt). So you have 2 categories in debt and 2 in equity. In fact you can do away with just multi-cap and ultra-short term funds and have a good asset allocation between those.

With in each category, go for 2-4 funds from different fund houses for diversification. That will bring the total number of funds to 4-8 (depending on the number of categories). Now, depending on how you want to track, you may want to have different folios for each goal. Lets say you have 2 goals, then you will have 8-16 folios in your portfolio! As you can see sometimes too many folios may not be avoidable.

Consolidate folios

If you have multiple folios of the same fund or fund house and you want to consolidate, you can simply write to the fund house to consolidate and they will do the needful. For example you can use Franklin India folio consolidation form to consolidate accounts/folios under Franklin. Just search for the AMC’s folio consolidation form on your favorite search engine. Consolidating folios should remove some cruft from your portfolio.

Short-list funds that will get the boot

Look at your portfolio and find all the stale funds you don’t invest in anymore or don’t want to own. Now you need a plan to get rid of them. Before you decide to sell any fund, first make sure you can exit the fund without incurring exit load. Most equity funds and some debt funds have exit loads, some up to 3 years. So check that first. The redemptions follow first in-first out, which means your oldest purchases will be sold first. Check your transactions and see if there are any purchases that are outside of the exit load. Equity and debt redemptions need to be handled slightly differently.

Sell Equity

Getting rid of equity is slightly easier because of the tax efficiency. Any capital gains up to Rs. 1 lakh in a year are tax-free. Moreover, if you have invested before January 31, 2018, then you are eligible for grand-fathering. What this means is that if you sold something today then your purchase price will be higher of your actual purchase price or the NAV of the fund as on January 31, 2018. Since most funds have peaked on January 31, 2018, this would cut down your capital gains by a lot. I used that opportunity to a good effect (more on that in another post).

For example, lets say you purchased 1000 units of a fund on Jan 1, 2018 at a NAV of Rs. 100 and you sold at NAV of Rs. 300 today. Assume NAV of the fund on Jan 31, 2018 is Rs. 200. Then your capital gains will not be Rs. 2,00,000 [(300 – 100) x 1000], instead it will be Rs. 1,00,000 since your purchase price will be Rs. 200.

In addition, this is a good time to consolidate equity funds because the market is down from the highs and hopefully, all your equity funds are lower than Jan 31, 2018. In this case, you can sell some of your funds and invest into an already existing fund. You would be consolidating without any tax liability. There are a couple of ways you can do it.

One way to do it is sell all or a big chunk of the fund today and then invest it after 3 business days when the money is credited in your bank account. But given the wild fluctuations of market these days, you may be wondering if you will sell low and buy high. To avoid this you can follow the second method.

In the second method, you basically sell some amount today and invest the same amount in another fund. Then keep repeating it everyday. The advantage of this method is that you don’t run the risk of buying high and selling low. But the disadvantage is that it will take longer and should have some money in the bank to execute this properly. Here I am assuming you have 6 months of emergency expenses in your bank. Then every day sell and invest one month’s worth of expenses. Since the sold funds will come after 3 days, the 2nd day you will be selling and investing another month of expenses. Again on 3rd day too. After that your first redemption will hit your bank, and so you will be investing that. This can go on until your consolidation is complete. It is a little bit risky because you will be using your emergency funds. Alternatively sell 3 months worth of expenses today and start the chain reaction 3 days later. You may risk a little of downside if the first sell is on the low side but it is less riskier.

Sell Debt

Consolidating debt mutual funds is a little bit tricky since the taxes are higher. If you are fine with paying some tax, then you can do the same as with equity. Only thing is that you do not need to time it like in equity funds. Debt funds, especially the lower duration funds do not change much on a daily basis. But I would not suggest consolidating debt funds unless you are using it to rebalance asset allocation. If you are rebalancing, then sell the debt funds you don’t want to hold anymore and invest into equities.

So go ahead and consolidate the funds to your hearts content. This might be a good time to clean up that messy portfolio.

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