For many Indian investors, the quest for diversification has led to a counterproductive outcome: a portfolio overflowing with too many mutual funds. The common issue is no longer a lack of choice, but a portfolio resembling a fridge stuffed with forgotten leftovers. It's time to embrace simplicity.
The Problem: Diversification or Confusion?
Open a typical portfolio today, and you might find 14 equity funds, 3 hybrid funds, 2 ELSS, 1 international fund picked after a YouTube video, and a New Fund Offer (NFO) whose purpose is long forgotten. Half the Systematic Investment Plans (SIPs) might be for minimal amounts like ₹1,000. The investor often cannot articulate why each fund is there, yet they ask, "Is my portfolio diversified?" The honest answer is often, "Yes, it's diversified. But mostly in confusion."
This clutter creates extra paperwork, confusion about which SIP to modify, and crucially, zero real diversification if the funds hold the same underlying stocks. The solution lies not in adding more, but in building deliberately from a strong core.
The Blueprint: Building a Portfolio Brick by Brick
Adopting a methodical approach, like the one used in Value Research Fund Advisor (VRFA) model portfolios, is key. The philosophy starts with a minimalist question: "What is the minimum we can get away with?" This leads to a structured, four-step process.
Step 1: Establish a Strong Core Fund
Every solid portfolio begins with one "boringly good" core equity fund capable of heavy lifting for years. This should be a broad, well-diversified fund like a flexi-cap, large-cap, or a simple broad-market index fund. It shouldn't require constant monitoring or chase fads.
Starting with a single flexi-cap fund with a ₹10,000 monthly SIP can grow to over ₹9 lakh in five years. Getting this first fund right means you're 60–70% of the way to a good portfolio. At VRFA, this is the foundational step for every investor, whether starting fresh or cleaning up a messy portfolio.
Step 2: Add a Second Core Pillar, Not a Clone
The urge to add a second fund is natural, but it must serve a purpose. Valid reasons include a meaningfully grown SIP size, a substantial equity corpus, or a need to spread manager or style risk. A poor reason is simply because a fund appears on a "Top 10" list.
The second core fund should bring a different style or structure—for instance, pairing a large-cap-oriented fund with one that has mid-cap exposure. If two funds from similar Asset Management Companies (AMCs) hold the same top 20 stocks, you have duplication, not diversification. VRFA's system highlights this overlap, often revealing that "five different funds" own the same 25–30 companies.
Step 3: Introduce a Satellite Fund for a Strategic Tilt
Only after a steady core of typically two funds should you consider a "satellite" fund. This is a side dish—like a mid-cap, small-cap, or a specific strategy fund—meant to add an extra kicker, not become the main course.
The core should constitute 70-80% of the total equity allocation, with the satellite taking 20-30%. Over 10-15 years, the core provides stability while the satellite enhances long-term returns. If satellites grow to 60–70% of your equity, you're increasing risk, not optimizing returns. In VRFA models, satellites are small, carefully chosen, or sometimes absent for conservative investors.
Step 4: Incorporate Debt or Hybrid Funds for Risk Management
The unglamorous but critical layer is debt or hybrid funds, acting as the portfolio's shock absorber. For goals 3-5 years away, part of your allocation should be in safer assets like a short-duration bond fund or an equity savings fund.
For a goal four years away, using an equity savings fund (with ~30% equity, the rest in debt/arbitrage) instead of 100% equity can drastically reduce volatility. In March 2020's 23% market fall, such a portfolio might have fallen only around 10%, helping investors stay the course instead of panicking. VRFA builds every recommendation by first determining the asset allocation suited to the goal's timeline.
The Real Enemy: Duplication and Overlap
The biggest disease in Indian portfolios is owning multiple versions of the same thing—like five ELSS funds bought on annual advice or four flexi-cap funds that topped rankings in different years. This creates administrative clutter without genuine diversification.
The first step for any investor with a cluttered portfolio is a cleanup. Compare your holdings to a model portfolio aligned with your risk profile. Ask for each fund: "If I remove you, what important job will stop getting done?" If the answer is "nothing much," you've found clutter. Often, the best new investment is getting rid of an old, redundant one.
The Ideal Portfolio: 4-6 Purposeful Funds
A sensible, long-term portfolio for a typical investor is elegantly simple:
- One or two core equity funds holding the majority of equity money.
- One or two satellite equity funds (or none) for a strategic tilt.
- One or two debt or hybrid funds to manage risk and shorter-term goals.
That's it. Four to six funds, chosen with discipline. This contrasts sharply with a 15-fund portfolio where you're merely hoping for the best. A solid portfolio grows from one good core into a small, well-organized team where each member has a clear role. In the long run, this calm, reliable strategy outperforms the noisiest "Top 10 Funds" list every single time.
(Based on insights from Sneha Suri, Lead Fund Analyst at Value Research's Fund Advisor service.)
