I have Rs. 70 lakhs in SIPs across 11 funds. Should I close them and invest in FDs or another fund?

Ans: Your corpus of Rs 70 lakhs, spread across multiple mutual funds from various platforms, is a commendable achievement. You're also continuing to invest through SIPs, which is a disciplined and smart approach. However, having too many mutual funds can dilute the overall performance, making it difficult to track and manage effectively. Let’s evaluate whether you should continue with these funds or look for better alternatives.

Diversification vs Over-Diversification
Diversification is essential in reducing risk, but investing across 11 different fund houses can lead to over-diversification. When you invest in too many mutual funds, especially from similar categories, the portfolio might lose its focus. This can lead to:

Duplication of Holdings: Many mutual funds from different fund houses may have the same stocks in their portfolios, offering no real diversification benefit.

Difficulty in Monitoring Performance: Tracking the performance of so many funds can be challenging, and you might miss out on making timely decisions on underperforming funds.

Diluted Returns: Spreading investments too thin across multiple funds may result in average returns, instead of focusing on the best-performing funds.

Should You Move to Fixed Deposits?
Fixed deposits (FDs) are safe investments, but they might not be the best option given your long-term goals. Here are a few reasons why:

Lower Returns: FDs generally offer returns that barely beat inflation. Over the long term, inflation could erode the purchasing power of your savings in an FD.

Taxation: The interest earned on FDs is fully taxable as per your income tax slab, which reduces the post-tax returns further.

While FDs provide safety, they do not offer the growth potential of mutual funds, especially equity mutual funds, which are critical for wealth accumulation over time.

Optimizing Your Mutual Fund Portfolio
Instead of withdrawing from all your current mutual funds, a better approach would be to streamline and optimize your portfolio. Here’s how you can do it:

Review Fund Performance: Identify the underperforming funds in your portfolio and consider exiting them. Compare their performance with similar funds and the benchmark. If a fund consistently underperforms, it may be time to switch.

Focus on Actively Managed Funds: Actively managed funds often outperform passive options like index funds because fund managers can make tactical decisions based on market conditions. By reducing the number of funds and focusing on well-managed, high-performing funds, you can improve your overall returns.

Avoid Index Funds: While index funds might seem attractive due to their low expense ratios, they simply mimic the market and may not provide superior returns in the long run. Actively managed funds give you the benefit of professional fund management, which is crucial for navigating volatile markets.

Regular Funds vs Direct Funds
If you’re investing in direct mutual funds, you may save on expenses, but there’s a catch. Direct funds require constant monitoring and adjustment. Investing through a Certified Financial Planner using regular funds provides professional advice, portfolio rebalancing, and strategic adjustments, ensuring your investments align with your financial goals.

Expert Guidance: A CFP can help you choose the right funds based on your risk profile and goals, which is especially important when consolidating your portfolio.

Performance Monitoring: A CFP regularly tracks your portfolio and makes necessary changes, which is crucial in achieving long-term goals.

Taxation of Mutual Funds
It’s essential to keep in mind the new capital gains taxation rules on mutual funds:

Equity Mutual Funds: Long-term capital gains (LTCG) above Rs 1.25 lakh are taxed at 12.5%. Short-term capital gains (STCG) are taxed at 20%.

Debt Mutual Funds: For debt funds, both LTCG and STCG are taxed as per your income tax slab.

Since you plan to build wealth over time, ensure your portfolio is structured to maximize tax efficiency.

Focus on Goal-Based Investing
Before making any decisions about whether to withdraw or switch investments, it’s essential to align your portfolio with your financial goals. Ask yourself:

What is your investment horizon? If your goals are long-term (more than five years), equity mutual funds remain the best option. For short-term goals, consider debt funds or hybrid funds.

What is your risk tolerance? If you can tolerate market fluctuations, equity-heavy mutual funds are ideal. Otherwise, a balanced approach with some debt allocation will offer stability.

What are your liquidity needs? If you need liquidity in the near term, ensure that your portfolio has a mix of liquid or short-term debt funds that can be easily redeemed.

Rebalancing Your Portfolio
To achieve optimal results, consider rebalancing your portfolio:

Reduce the Number of Funds: Consolidate your investments into a few high-quality funds. Aim for 5-6 funds across different categories (large-cap, mid-cap, multi-cap, and hybrid). This will simplify tracking and improve performance.

Review Asset Allocation: Ensure your portfolio maintains an appropriate balance between equity and debt. If you’re nearing retirement, you may want to increase the debt component to reduce volatility.

Exit Underperforming Funds: If a fund has consistently underperformed for over two years, consider switching to a better-performing option. Regular monitoring and review are essential.

Emergency Fund and Contingency Planning
It’s also vital to maintain a sufficient emergency fund. This fund should be kept in liquid assets, such as liquid mutual funds or short-term debt funds, rather than FDs, to ensure easy access and better post-tax returns.

Health Coverage and Insurance
Review your health and life insurance coverage as part of your overall financial plan. Having adequate coverage ensures that medical emergencies don’t derail your financial goals. If you hold LIC, ULIPs, or investment-cum-insurance policies, consider surrendering them and reinvesting the proceeds into mutual funds for better returns and flexibility.

Finally
Here’s a summary of what you can do next:

Streamline your mutual fund portfolio by reducing the number of funds.

Focus on actively managed funds for long-term wealth creation.

Avoid FDs for long-term goals due to their lower returns and tax inefficiency.

Consolidate and optimize your portfolio with the help of a Certified Financial Planner.

Maintain a balanced approach between equity and debt based on your risk tolerance.

Ensure your investments align with your financial goals and liquidity needs.

Best Regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment