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| Capitalstars Investment Advisor |
Financial planners very often have to deal with the problem of plenty. When clients first meet them with their portfolio, in most cases, they have too much of one or more financial products. A few planners Mint spoke with said multiple bank accounts, an overdose of mutual fund investments and an excessive number of insurance policies are quite common. You may think that having multiple products signifies a healthy diversification, but it could also compound to confusion in terms of keeping a track. Too many investments, especially of the same nature, often is the result of fuzzy goals or last-minute rush to save taxes but keep in mind that too much of anything is never a good idea.
Vishal Dhawan, certified financial planner, and founder, Plan Ahead Wealth Advisors said, a clutter of financial products means one is unfocused on the end objective. “What invariably happens is when you actually sit down to clean it up, you are no more rational and tend to eliminate everything and start from scratch, which is a wasted effort," said Dhawan. So is there a perfect number of every financial product that one must hold? Not always. But there’s a way to ensure multiple products don’t come in the way of a healthy financial life. We tell you how to Marie Kondo your money life.
Mutual funds
When it comes to mutual funds, understand that having too little exposure means being too concentrated and having too many schemes means being over-diversified. Sanjiv Singhal, founder, Scripbox, an online mutual funds platform said that too many mutual funds in an individual’s portfolio are a common phenomenon as investors approach investing as buying mutual funds rather than analyzing their financial objective. “Sometimes, investors justify holding many funds in the name of diversification. But most people forget that a mutual fund is already diversified in itself. Having too many different funds that do the same job is not going to help your portfolio," added Singhal. Understand that over-diversification could make it difficult to keep a tab on how the schemes are performing and, hence, you may not realize when to exit the ones underperforming. Financial planners suggest investing in not more than six to seven schemes. “Since the underlying securities in the schemes are a driver of performance, too many schemes could result in large overlaps of securities," said Dhawan.
The right way to plan your mutual fund investments is to start with a goal and depending on your risk appetite and time horizon, build the portfolio. “Having two each of large-cap and multi-cap equity mutual funds should cover most long-term goals. For those with larger portfolios, an addition of mid-cap funds and international funds may be considered," said Singhal. For short-term goals and emergency needs, investing in two or three liquid debt funds is a good idea. Also, keep in mind that over-diversification could make it difficult for your nominee to get a grip on things in your absence. Each fund house has a slightly different process for transmission of assets and a nominee has to navigate through this. It’s a fair amount of paperwork, said Singhal. It’s advisable to stick to only as many funds as you really need and ensure your nominees are aware of them.
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