Most investors end up owning too many mutual funds through impulse, tips, or changing market cycles. The result is a portfolio that mirrors an index yet charges active fees. Deciding what to buy is easy; deciding what to sell requires discipline. Here’s a structured framework to evaluate your mutual funds objectively and simplify your portfolio without compromising returns.
Sell Based On Goals And Emergencies
Every decision must begin with intent. If you need liquidity for an emergency or your financial goal is due, whether it’s a home down payment, a wedding, or a car purchase, redeem only the required amount. If not, stay invested. Don’t overthink fund ratings, market volatility, or news flow at this stage. Selling purely because of short-term noise often does more harm than good. The only valid reasons to sell early are necessity and timeline maturity.
Sell Underperformers
The top-performing funds change every year. What’s celebrated today could lag tomorrow. Constantly chasing “new winners” leads to duplication and mediocrity. Instead, rely on data. Compare each fund’s five-year CAGR against both its benchmark and category average.
If both comparisons show underperformance, it’s a clear signal to exit. Consider the HSBC Mid Cap Fund, which delivered 24.86% CAGR over five years. Its benchmark, Nifty Midcap 150 TRI, returned 27.72%, while the category average stood at 26.6%. The verdict is obvious: the fund has lagged both its peers and the index, and holding it any longer may cost you an opportunity.
Sell Based On Investment Style
A fund’s performance matters only if you can stay invested through its cycles. Value and Growth funds demand very different temperaments.
If you struggle with prolonged underperformance or prefer chasing momentum in bull markets, a Value Fund will frustrate you. On the other hand, if volatility and long drawdowns make you anxious, a Growth Fund will test your patience. Growth-oriented portfolios, often tilted toward small-caps or concentrated sectors, tend to underperform for extended periods before outperforming sharply.
The ideal fund isn’t the one that promises the highest return; it’s the one you can hold without losing conviction when the market tests you. Alignment between investment style and investor psychology is often more important than the style itself.
Sell Based On Portfolio Overlap
Owning multiple funds from different categories doesn’t guarantee diversification. If several of them hold the same stocks, your portfolio may behave just like a single fund, only with higher expenses and amplified volatility.
For example, Bandhan Large Cap Fund and Bandhan Flexi Cap Fund share about 56% of their portfolio. In such cases, retaining both adds little value. When overlap exceeds 50–60%, exit the fund with the higher expense ratio. If it’s moderate (30–50%) between a Flexi-cap and another diversified category, keep the Flexi-cap as your core holding.
Sell Based On AUM Size
A fund’s size can affect its agility. This is particularly true for small-cap and mid-cap funds. Once a small-cap fund’s AUM crosses ₹25,000 crore or a mid-cap fund’s ₹35,000 crore, managers often shift to large-caps to manage liquidity. This dilutes the very reason investors chose them, i.e. exposure to smaller, high-growth businesses.
Ensure that at least 80% of the fund’s corpus remains invested in its intended segment. If not, consider switching. You’re not just paying for returns, but for how faithfully the fund sticks to its strategy.
Sell Based On Diluted Bets Or Concentrated Sector Bets
Both concentration and over-diversification can affect the outcomes. If the top three sectors form over 60% of a portfolio, returns will swing sharply with market cycles. Conversely, if a fund holds 80–100 stocks, it behaves like an index while charging active management fees, a contradiction in purpose.
A well-constructed mutual fund is selective but focused, diversified but purposeful. Anything outside that range deserves scrutiny.
Simplify and Rebalance with Intent
Rebalancing a mutual fund portfolio isn’t an overnight exercise. It takes time, sometimes a few months, to sell and realign thoughtfully. The ultimate goal should be clarity and conviction. Aim to consolidate your holdings into three or four funds that truly reflect your financial goals, risk tolerance, and time horizon.
The mark of a mature investor isn’t how many funds they own, but how few they need to meet their objectives.
The securities expressed are for informational purposes only and do not constitute financial advice. Investors should consult a certified adviser before making investment decisions. Finology is a SEBI-registered investment advisor firm with registration number: INA000012218.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
