Building a mutual fund portfolio requires more than simply adding multiple schemes across categories. Financial planners say investors often end up over-diversifying portfolios, leading to duplication, excessive exposure to certain segments, face difficulty in managing investments effectively and they generally recommend maintaining a balanced allocation across largecap, midcap, smallcap and diversified strategies based on risk appetite, investment horizon and financial goals.
A similar query came from Neetu, a viewer of The Money Show on ET Now, who has a couple of funds in which she has put the money. She has invested in HSBC Smallcap - Rs 11 lakh. She has got Quant Smallcap, Parag Parikh Flexicap, Quant Flexicap, WhiteOak Capital Midcap, Motilal Oswal Nifty Midcap 150 Index, Axis Midcap, Axis Bluechip, Bandhan Sterling Value Fund, SBI PSU, ICICI Pru Commodity Fund, Mirae Asset Large and Midcap.
Responding to this portfolio-related query, Nisreen Mamaji reviewed an investor’s holdings spread across multiple schemes including smallcap, midcap, flexicap, sectoral and value funds. According to her, while the portfolio consisted of several good-quality mutual funds, the key issue was excessive overlap and disproportionately high exposure to smallcap and midcap categories.
“Your portfolio has good funds but the issue is too many schemes and higher overlap, especially in the mid and the smallcap. So, what I have observed is that your smallcap exposure is very high, that is the biggest risk in your portfolio,” the expert said.
The expert pointed out that the investor’s allocation towards smallcap funds was particularly high. The portfolio included nearly Rs 11 lakh in HSBC Mutual Fund’s smallcap fund along with an additional exposure of Rs 3.64 lakh to Quant Mutual Fund’s smallcap scheme, taking total smallcap allocation close to 39% of the portfolio.
According to her, such a high allocation towards smallcaps significantly increases portfolio risk, especially during volatile market conditions. She suggested that the ideal allocation towards smallcap funds should generally remain in the range of 15% to 20%.
The expert also highlighted overlap within the midcap category. The investor held exposure across multiple midcap-oriented schemes including funds from WhiteOak Capital Mutual Fund, Motilal Oswal Mutual Fund and Axis Mutual Fund. According to her, maintaining multiple funds within the same category often creates duplication rather than improving diversification. As of now the exposure in mid cap funds or the category is around 17% over three funds. So, there is an overlap there.
She advised consolidating midcap exposure into a single scheme instead of holding several similar funds and specifically suggested continuing with the Motilal Oswal Nifty Midcap 150 Index strategy for midcap allocation.
The flexicap portion of the portfolio also reflected duplication, according to the expert. The investor held both Parag Parikh Flexi Cap Fund and Quant Flexicap Fund, with combined allocation of nearly Rs 9.6 lakh or around 26% of the portfolio. So she recommended reducing duplication by retaining only one flexicap strategy, suggesting Parag Parikh Mutual Fund’s flexicap scheme as the preferred option for the portfolio.
At the same time, she noted that the portfolio’s largecap exposure remained significantly lower than ideal levels. The investor had limited allocation towards largecap-oriented funds through Axis Bluechip and Mirae Asset Large and Midcap Fund, resulting in overall largecap exposure of around 10% which should ideally be increased to around 30% to 35% to improve portfolio stability and reduce volatility. She suggested increasing exposure either through a Nifty 50 Index Fund or a diversified bluechip strategy.
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The expert also advised reducing allocations towards cyclical and thematic funds such as SBI PSU Fund and ICICI Prudential Commodity Fund. According to her, thematic and sectoral allocations should generally remain minimal in long-term core portfolios due to their higher cyclicality and concentration risk.
Instead, she recommended increasing allocation towards value-oriented strategies such as the Bandhan Sterling Value Fund. She suggested raising value fund allocation to around 10% as part of a more balanced portfolio approach.
The expert said that, “So, you have Parag Parikh Flexicap about Rs 5.98 lakh or Rs 6 lakh and Quant Flexicap about Rs 3.6 lakh. So, you can reduce that exposure as well in terms of duplication. And your largecap exposure is very limited. So, you only have 10% in largecaps which should be ideally 30% to 35% for stability sake. So, you have Axis Bluechip about Rs 2.13 lakh and Mirae Large and Mid about Rs 1.65 lakh. So, what you can do is because of the number of funds you can exit or gradually reduce the Quant Flexicap because that is a duplication.”
Summarising the ideal structure, the expert suggested a portfolio allocation comprising approximately 30% largecaps, 20% midcaps, 20% smallcaps, around 20% flexicap exposure and about 10% towards value-oriented investing.
She also clarified that no additional mutual fund schemes were required in the portfolio. According to her, the focus should instead be on reducing the number of schemes and simplifying the structure for easier management and better asset allocation discipline.
The expert further explained that having too many mutual funds across categories often makes tracking and rebalancing difficult for retail investors. In many cases, investors end up spending disproportionate time managing overlapping funds without meaningful diversification benefits.
According to the expert, “So, in all of them if you are doing SIPs you can continue an equal ratio for your SIP calculations, but it is very difficult for a retail investor to keep on rebalancing this. So, what I would suggest is that over a period of time it is likely that your equal one, 20% each in each of these proportions has again got misaligned.”
She further said that, “So, when you are closer to a goal being realised, that is the time that you can do your rebalancing activity and as we mentioned earlier in the same proportion try to remain equal in each or maybe reduce if your smallcap exposure become too heavy, then reduce it at the time that you are actually closer to a goal and that is a good time for you to rebalance your portfolio.”
On the investment strategy front, the expert said SIPs could continue alongside the existing portfolio but suggested slightly higher allocation towards midcap and smallcap categories through future SIP investments. However, she advised maintaining discipline and periodically reviewing allocations to prevent excessive exposure buildup over time.
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She also stressed the importance of portfolio rebalancing, particularly when investors approach their financial goals. According to her, rebalancing becomes crucial when market movements distort the intended allocation mix and increase concentration risks in specific segments.
A simpler and well-balanced portfolio is often more effective than maintaining a large number of overlapping schemes across similar categories.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
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