“I want to invest more/I want to increase my SIPs. Can you suggest good new funds that I don’t hold?” – is a question that we hear often. The key here is that many of you automatically think that you need to add more funds to your portfolio when you are investing more. Is this necessary? Here is a detailed guide on how you can go about deploying additional sums in mutual funds.
Why you should not add schemes for the sake of adding
When you simply add schemes for fresh investments that you make (without any reason), you are upsetting your original portfolio make up. For example, if you simply pick the new ‘chart topper’ and add fresh investments, you may be upsetting both your asset allocation and category allocation carefully built and change the risk profile of your portfolio.
On top of it, it is quite possible that you are duplicating your portfolio with a fund strategy that is already being followed by one of your existing funds. Above all, holding too many funds in a portfolio run the risk of delivering mediocre returns. Data from one of the classic investment books: A Random Walk Down Wall Street by Burton Malkiel, will tell you that beyond a point, diversification does not help reduce volatility nor does it improve portfolio performance. While that was with stocks, it can be no different with funds, especially when funds tend to hold the overlapping portfolios.
When to add new schemes
1. Investing towards a new goal – If you plan to deploy your additional investments towards a new goal, you may have to consider new funds. Here again, only if the goal requires a different asset and category allocation because of a different time frame, you should consider adding new funds. There is no harm in creating a new portfolio (to keep track of the new goal) but add some existing schemes in it. For example, if you have HDFC medium Term Opportunities as part of your debt allocation in your present portfolio (say child education) you can have this fund in a new portfolio, say earmarked for retirement. If you ascertain from your advisor that the fund is good, there is little need to go for a new fund. In other words, it is good to add 1 or 2 new funds into the new portfolio for the sake of diversification but ensure you don’t miss out on the good, steady ones that you already hold.
2. Substantial increase in investment – If you are simply increasing investments for the current goal, then the quantum of increase in your investments will matter. If you have been investing Rs 5,000 in SIPs and now either have a large sum (say Rs 50 lakh) or want to increase the SIP to say Rs 50,000 a month, then you need to assess the following things:
- Whether your portfolio could not be diversified across categories earlier because the investment amount was small
- Which funds in the portfolio are underperforming and whether new funds can be introduced for the additional sum
When you started investing with smaller sums, you could perhaps not add a mid-cap fund or a diversified fund into your portfolio. Or perhaps you went overboard on midcaps and did not have sufficient large or diversified fund exposure. This would be the time to rejig your category allocation based on what is ideal for your time frame and risk appetite. Add funds in the originally ignored categories so that you have the right diversification now.
How to go about deploying fresh money
- If you have good-performing funds from your portfolio, your advisor will likely ask you to increase your investments in those funds rather than adding new ones.
- While the above is done, it needs to be ensured that you maintain your original equity:debt allocation and category allocation. Hence the allocation to existing funds in your portfolio will have to be accordingly done. Towards this, a new fund may also be added if there is a deficiency.
- When the diversification is done because you have a larger sum to deploy now, your advisor will likely make sure that the additional scheme to be added within a certain category is not similar in strategy or style compared with your existing fund. For example, if you had a Birla Sun life Front Line Equity for a large-cap fund, then perhaps the new addition may be more value conscious fund like Franklin India Bluechip. In debt, if you had a duration fund (dynamic bond), then the new additional may be an income accrual and so on. The idea is to diversify across strategies, if it is lacking in your portfolio.
- Bringing in fresh sums could also be a time to rebalance your portfolio, if your equity:debt allocation goes out of whack. For example, if a 60:40 equity: debt portfolio has moved up to an 80:20 allocation, then the focus would be on adding more debt to bring it closer to original allocation.
- Investors often want a chunk of their fresh investments to be deployed in the top performing scheme in their portfolio. Remember, that fund may not always be at the top and may be replaced by another fund in your portfolio next year. The reason why you hold other funds in your portfolio is to diversify. Hence continue to follow the principle of spreading money across the funds you hold. But do not diversify afresh when there is no need.