I Invested in 8 Funds and All Are in the Same Category — What Should I Do?

Your Portfolio Feels Stuck. Here’s Why.

You did what you thought was right. You started investing in mutual funds to build wealth. You even diversified by buying eight different funds. But when you look at your portfolio, something feels wrong. The returns are not what you expected, and all the funds seem to move up and down together. It’s frustrating. This is a common problem, and it usually happens for one big reason: all your funds are in the same category.

Thinking you are diversified because you own many funds is a frequent mistake. If you want to understand how to choose mutual fund in India effectively, you first need to understand what true diversification means. Owning eight different large-cap equity funds is like owning eight white shirts from eight different brands. They might look slightly different, but they all serve the same purpose. You are not prepared for an occasion that requires a different colour.

The Problem of Portfolio Overlap

When you invest in multiple funds from the same category, you create a problem called portfolio overlap. This means that your different funds are all holding the exact same stocks. For example, most large-cap funds in India will invest heavily in companies like Reliance Industries, HDFC Bank, and TCS. So, your Fund A, Fund B, and Fund C are all essentially buying the same shares on your behalf.

Portfolio overlap happens when two or more mutual funds in your portfolio hold the same securities. High overlap reduces the benefits of diversification and can concentrate risk, making your investments behave like a single fund.

This lack of true diversification means you are taking on concentrated risk without knowing it. If the large-cap segment of the market performs poorly, your entire portfolio suffers. The whole point of diversification is to spread your money across different types of assets so that if one area goes down, another might go up, balancing out your returns.

How to Fix Your Crowded Portfolio

Realizing your portfolio is over-concentrated can be stressful, but the solution is straightforward. You need to consolidate your holdings and then rebuild with a proper asset allocation strategy. Here is a step-by-step approach.

Step 1: Stop and Analyse

First, don’t panic and sell everything at once. This could lead to unnecessary exit loads and taxes. Instead, make a list of your eight funds. For each fund, find the following information:

• Category: Is it large-cap, mid-cap, flexi-cap, or something else?
• Expense Ratio: How much are you paying in fees? Lower is better.
• Performance: How has it performed against its benchmark index over 1, 3, and 5 years? Look for consistency.
• Fund Manager: Who manages the fund and how long have they been there?

Step 2: Consolidate and Keep the Best

From your list of eight similar funds, your goal is to identify the top one or two. Look for the funds with a history of consistent performance, a reasonable expense ratio, and a stable management team. These will become your core holdings in that category. It is much better to have one or two strong funds than eight average ones.

Step 3: Sell the Underperformers Strategically

Once you have chosen the funds to keep, plan to sell the others. Be mindful of taxes. In India, equity funds held for more than one year are subject to long-term capital gains (LTCG) tax, while those held for less than a year face short-term capital gains (STCG) tax. Also, check for any exit loads, which are fees charged if you sell within a certain period, usually one year. You might decide to sell gradually to manage the tax impact.

Step 4: Reinvest for True Diversification

This is the most important step. Take the money from the funds you sold and reinvest it into different categories to build a balanced portfolio. If your core holding is a large-cap fund, you should now consider adding funds from other categories like:

• Mid-Cap Funds: Invest in medium-sized companies with high growth potential.
• Small-Cap Funds: Invest in smaller companies. Higher risk, but potentially higher rewards.
• Debt Funds: Invest in bonds for stability and income. Good for balancing equity risk.
• International Funds: Gives you exposure to global companies and markets.

A healthy portfolio usually has a mix of these, depending on your goals and risk appetite. A simple portfolio of 3 to 5 funds across different categories is often more effective than a portfolio of 8 or 10 funds from the same one.

A Better Way: How to Choose Mutual Funds in India from the Start

To avoid this problem in the future, you need a solid framework for selecting funds. It’s not about finding the number one fund from last year; it’s about building a portfolio that works for you.

1. Define Your Goals and Risk Tolerance

Why are you investing? For retirement in 30 years? A down payment on a house in 5 years? Your goal determines your investment horizon, which in turn affects your fund choice. Are you comfortable with sharp market swings, or do you prefer slow and steady growth? Be honest with yourself about your risk tolerance.

2. Understand Asset Allocation

Asset allocation is simply how you divide your money between different asset types, mainly equity and debt. A young investor with a high-risk tolerance might put 80% in equity and 20% in debt. Someone closer to retirement might do the opposite.

3. Research and Select a Few Good Funds

Once you know your asset allocation, select one or two funds within each chosen category. Instead of chasing past returns, focus on fundamentals. For reliable information on funds, you can check resources like the Association of Mutual Funds in India (AMFI). Building a portfolio isn't a race to collect as many funds as possible. It is a thoughtful process of selecting a few good ones that align with your financial journey.