Building your own portfolio

While mutual funds are popular and attractive investments because they provide exposure to a number of stocks in a single investment vehicle, too much of a good thing can be a bad idea.

The addition of an increasing number of funds simply creates an expensive index fund. This notion is based on the fact that having too many funds negates the impact that any single fund can have on performance, while the expense ratios of multiple funds generally add up to a number that is greater than average. The end result is that expense ratios rise while performance is often mediocre.

Although there are hundreds of mutual fund offering in Indian mutual fund industry, there's no magic number for the "right" number of mutual funds in a portfolio. Despite the lack of agreement among the professionals regarding how many funds are enough, nearly everyone agrees that there is no need for dozens of holdings. In fact, even many mutual fund houses are now promoting life-cycle funds, which consist of a mutual fund that invests in multiple underlying funds The concept is simple: pick one life-cycle fund, put all of your money into it, and forget about it until you reach retirement age. These funds, also referred to as "age-based funds"(Fund of funds20-30-40-50) have an intrinsic appeal that's hard to beat.

If you prefer to build your own portfolio, there are simple steps you can take to limit the number of funds in your portfolio while still feeling comfortable with your holdings. It begins by considering your objectives. If income is your primary goal, that international fund may not be necessary. If capital preservation is your objective, a mid-cap fund may not be needed either.

Once you've determined the mix of funds that you wish to consider, compare their underlying holdings. If two or more funds have significant overlap in holdings, some of those funds can be eliminated. There's simply no point in having multiple funds that hold the same underlying stocks.

Next, look at the expense ratios. When two funds have similar holdings, go with the less expensive choice and eliminate the other fund. Every rupee saved on fees is one more rupee working for you. If you are working with an existing portfolio rather than building one from scratch, eliminate funds that have balances that are too small to make an impact on overall portfolio performance. If you've got four large-cap funds, move the money to a two best performing funds. The amount spent on management-related expenses is likely to decrease and your level of diversification will remain the same.
Happy Investing.

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