The case against holding twelve mutual funds

How it happens

Nobody sets out to own twelve funds. It accumulates.

A first fund from a colleague recommendation. A second because it was topping a performance table. A third for tax saving in March. A fourth from a bank relationship manager. A fifth because a sector looked interesting. A sixth because the fourth was underperforming and switching felt safer than selling.

Each decision made sense in isolation. The result is a portfolio nobody designed.

The overlap problem

Large cap funds in India hold heavily overlapping portfolios. They are drawing from the same limited universe of large companies, benchmarked against similar indices, run by managers reading the same filings.

Six large cap funds may collectively hold the same thirty companies in slightly different weights. That is not six independent positions. It is one bet with six statements.

You can check this. Most fund factsheets list the top ten holdings. Put three of your funds side by side and count how many names appear in more than one. People are usually surprised.

What it actually costs

• No additional protection. Overlapping funds fall together. The second, fifth and ninth fund holding the same companies add nothing when those companies have a bad year.
• Diluted decisions. Twelve funds means no single one is large enough to matter, so good choices and bad ones both get averaged into irrelevance.
• More to track. Twelve factsheets, twelve manager changes, twelve expense ratios. Most people stop following any of them.
• Harder tax at exit. Twelve holdings redeemed means twelve capital gains calculations, and possibly twelve sets of short term units from recent instalments.
• Higher average cost, if some of them are regular plans or actively managed funds you would not choose today.

How many is enough

Fewer than most people expect. For a straightforward long term portfolio, a defensible structure is:

• One broad index fund for core equity exposure.
• Possibly one more for a genuinely different exposure, such as a wider index or an international fund, if you can state why.
• One debt or liquid fund for money needed sooner.
• Optionally a small gold allocation.

That is three or four holdings covering more real diversification than twelve overlapping equity funds, at a lower cost and with far less to track.

Fixing it without doing damage

Do not sell everything at once. A cleanup that triggers a large tax bill can cost more than the problem.

• Stop new money into the ones you would not choose today. Redirect instalments to the fund you want to keep. This fixes the direction immediately at no cost.
• Check holding periods before selling. Units under twelve months attract 20% rather than 12.5%.
• Use the Rs 1.25 lakh annual exemption to unwind gradually across financial years rather than all at once.
• Watch for exit loads and ELSS lock ins. ELSS units cannot be moved until each instalment completes three years.
• Keep the ones with the lowest cost and the widest mandate, other things being equal.

See diversification and tax on investments before acting.