(Originally published in MoneyControl.com)

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In previous essays in this series we saw the problems of having a large mutual fund portfolio and what is the right number of schemes to have in a portfolio.

That is all good for someone who is just starting to invest and build a portfolio. But what if you already have a portfolio that is large and unwieldy? How does one go about streamlining it? What to keep, what to divest?

In this essay, we’ll present  steps one needs to do to get started with the process, and guidelines to help an investor to trim their portfolio.

At the end of the day, the aim is to get a  lean, mean, portfolio machine.

First, let’s get organized

The first thing to do to trim an overgrown portfolio is to get all the information in one place. The one place can be a convenient online portfolio manager (like MoneyControl’s portfolio section), a Microsoft Excel spreadsheet, or even a sheet of paper. The advantage of online consolidation is,  that the information auto updated with the latest price and dividend declarations. An excel spreadsheet would be fine too.

The pieces of information that we would need to get in one place are :

1. AMC name
2. Scheme name
3. Type of scheme – equity or debt, also if it is a tax-saving scheme
4. Age of scheme – how long has the scheme been in the market
5. 3 and 5 year performance of the scheme
6. Rating of the scheme – any one of the popular scheme ratings
7. Dividend plan or growth plan
8. Date of investment
9. Holding profile – whether it is held singly or jointly, on whose name
10. Amount of investment
11. Current value of investment

Most of the above information should be from the statements of the fund house. However, not all fund houses send statements regularly, and not all of us are diligent in storing them safely. Fortunately, there is another way If you had provided your email address in your mutual fund application form, you can get your statement delivered by email from the back-office of the mutual fund companies.

Recently, one of these back-office entities, Computer Age Management Services (CAMS) has introduced a consolidated mail-back service that provides a holding statement for all the investments made using an email address. All that an investor has to do is to go to www.camsonline.com, click on “Investor services”, and then “Mailback services”. CAMS even provides consolidated statements across the mutual funds that it serves as well as those served by Karvy, another large mutual fund back-office unit.

However, one cautionary note - The resulting statement might not represent the entire set of holdings of an investor for these reasons: 

1. There are four such mutual fund back-offices. While CAMS and Karvy account for a bulk of mutual funds, there is Franklin Templeton (servicing FT schemes), and Deutsche (servicing JP Morgan schemes). If you have investments in FT or JPM, your holdings will not show up in the CAMS-Karvy statement
2. Inaccurate email address – We have often observed that investors either do not give their email addresses while applying, or the address is wrongly entered (for example, a “swaminathan@xyz.com” became “swami Nathan@xyz.com” (with a space).

One way to avoid these issues would be to use the primary investor’s PAN number as the identification for such a mail back services. Let’s hope that such an option would be available in the future.

Trimming down the portfolio

Getting all the information in one place is half the work done. The next is to make decisions about how to trim the portfolio to an ideal size.

The best way to begin is to define the end goal first. Two decisions need to be made upfront – 1. What is the target number of schemes, and 2. What the debt/equity ratio in the portfolio would be.

As we saw in the previous essay in this series, a portfolio could have between 4 and 7 schemes. But, how about debt/equity ratio? There are lots of studies on how to establish the debt-equity ratio in one’s portfolio, but the most famous formula is to subtract one’s age from 100, and the number is the percentage of equity that should be in your portfolio. For example, a 30-year old should have 70% equity and 30% debt in one’s portfolio. Definitely not an exact science, but a useful thumb rule. Also, an investor should understand that this applies to their overall portfolio – not just their mutual fund portfolio. Given that other investment options like PPF and NSC are primarily debt instruments, care should be taken to include them in the debt side of the asset allocation while deciding how much of your mutual fund portfolio should be on the equity side and how much on the debt side.

Once we have identified the asset allocation goal, the task now is to look at the existing portfolio and make decisions regarding what to hold, and sell. Some guidelines to help you make your decisions are: 

1. Performance, performance, performance: Nothing speaks louder than numbers – the three, four and five year returns of the schemes relative to both their benchmarks (such as NIFTY etc) and the peer schemes should be the first thing to consider. Any schemes that are lagging their benchmarks over longer time frames may better be marked for sale
2. Older the better – Once the laggards are marked, another criteria to look at  would be the age of the fund – the older the better. Any scheme with a long track record that has delivered on the performance, is definitely a keeper.
3. Ratings – While performance and age are quantitative criteria to use, there are other qualitative criteria as well – such as fund manager’s track record and stability of the fund house. These are hard for an individual investor to track, but they are reflected in the star rating of a fund. Any popular rating scheme (MoneyControl uses CRISIL ratings) can be used to identify the better of the schemes.
4. Debt funds –You can easily consolidate all the money in just two kinds of debt funds – an income fund (medium-term fund), and a short-term fund. A fund house that has a stable record with respect to debt funds is better (Canara, HDFC, IDFC and Deutsche are good examples).
   

Applying these guidelines will tell an investor what to hold and what to fold in order to get the holdings consolidated and to meet the asset allocation target.

The key, now, is to keep the portfolio in shape always. Any new investment decision – purchase or redemption – should be made in keeping with the overall portfolio goals established. A pinch of discipline and a dash of periodic due diligence are the vital ingredients for a healthy portfolio.

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