Cleaning the house or office desk might seem a cumbersome process, but you feel satisfied once it’s done. Similarly, having a well-pruned(MF) makes it more organized and easier to manage.
Spring-cleaning your MFis a step-by-step process that is tied to your financial goals:
1. Goal alignment
First of all, check if yourare in sync with your financial goals. List all your financial goals along with the financial target to be achieved over a time-frame. While some might be long-term oriented (child’s higher education or retirement), others like a down payment for a house or car will be short-term oriented.
If you have become a parent recently, you might want to add a new financial goal which says “child’s college education”. Similarly, achieving a financial goal will relieve you of its responsibility.
Once, you have a rough idea of the existing financial targets, work out your monthly contributions towards achieving them. Ideally, all long-term financial targets (over five years) can be achieved with equities (12-14% p.a.), while the rest could be attained with debt funds (6-8% p.a). It’s a function of how much do you understand asset class risk, the time in hand, and how much you can save.
So, work out the optimal equity-debt mix. Long term goals will have a greater allocation to while short term goals will almost all be fixed income-based.
of investors has come down sharply in the recent market correction. If you have surpluses, park it in a and transfer it systematically into , till you restore the -debt mix. However, if you don’t have any surplus, tweak the asset-allocation mix of existing in favour of equities till you hit the target.
should be done once in a year, or as and when necessary depending on your goals and time left to achieve them.
Once you have a grip on the, check if in your are fulfilling your objective. Some might have changed their fundamental attributes after the 2017 Sebi reclassification process. Some multi cap , for instance, have reclassified themselves as midcap . If these are no longer fulfilling your needs, consider replacing them.
Then, weed out the non-performers. Are theseable to beat the benchmark returns over the long-term? For , look at relative performance over five and seven-year time frames. Don’t hanker after returns and give a fair chance. Look for repetitive downgrades from accredited rating agencies.
Some funds might have changed their fundamental attributes after the 2017 Sebi reclassification process. Some multi cap equity funds, for instance, have reclassified themselves as midcap funds. If these funds are no longer fulfilling your investment needs, consider replacing them.
4. Less is more
Are you holding more than 20in your ? Perhaps, you are better off with indexing then. Take, for example, if you own a large cap , it’s tantamount to owning 22 per cent of BSE 100 stocks. And if you make it three, it becomes 34 per cent, assuming you all in the right . Moreover, there is a 37 per cent overlap (common stocks as a percentage of the overall ) by in equal proportion in these three .
As you own more, you indirectly end up owning more stocks.
As a thumb rule, hold only about four to fivewith distinct investment strategies and low overlap. Two large caps and two multi caps, for instance, should suffice for building long-term wealth for most investors.
Tax and more
Also, while exiting, assess if there are tax-inefficiencies or exit loads to minimize. Short-term are taxed at 15 per cent for , while it is 10 per cent for the long-term. However, by limiting long-term up to Rs 1 lakh in a financial year, you can completely save on taxes. Conversely, work out if you are sitting on any capital losses that can be set-off.
MFneeds to be tagged to your financial goals. Its spring cleaning involves a dynamic process where you calibrate , weed out laggards and minimize tax liabilities. And like office desk cleaning, you need to do it every now and then.