Strategies to keep your mutual fund portfolio balanced and unique
However, the truth is, it is often a duplication in disguise. A robust portfolio is characterized not by numbers but by purpose. Every fund should play a distinct role in helping you meet your financial goals. Think of it as assembling a team where everyone has a designated position, no one overlaps, and together they achieve a common goal.
Start with the basics: Asset allocation
Before selecting funds, the foundation must be established: how much money should be allocated to equity, debt, or hybrids? Equity is the growth engine, debt provides safety and stability, and hybrids strike a balance between the two. Getting this mix right is like laying the foundation of a house, which determines how strong everything else will stand.
Less is more
Owning ten large-cap funds doesn’t guarantee diversification. In fact, many may hold the same top companies, such as Reliance Industries, HDFC Bank, and Infosys. True diversification comes from carefully selecting 5 to 7 funds across categories.
For example, if there are two large-cap funds, A & B, both showing strong 5-year compound annual growth rates of 22% and 22.5% but their portfolios overlap heavily, with nearly 60% of their top 10 stocks being the same, then adding both doesn’t make you stronger; it only clutters your portfolio.
Watch out for overlap
Overlap occurs when multiple funds hold the same stocks or sectors. This quietly erodes the benefits of diversification. For instance, if one of your mid-cap funds already has 25% in financials, adding another fund with a similar bias doubles your exposure. A smarter approach is to complement existing holdings, pairing a financial-heavy fund with one tilted towards energy or infrastructure, which reduces concentration risk.
The idea is to make your funds complement each other, rather than duplicate each other.
Mix active with passive
A unique portfolio doesn’t mean chasing only star managers. Sometimes, simplicity works. Pairing a low-cost index fund with an actively managed flexi-cap fund provides both steady compounding and potential outperformance.
For instance, the category alpha in large-cap funds is just 0.49% over a three-year period. There are many low-cost index funds, such as the Nifty Next 50 Index Fund, which have delivered returns of more than 20% (5-year CAGR) with an expense ratio in the range of 0.25% to 0.30%. These funds capture market performance at minimal cost. Balancing such a fund with an actively managed mid-cap fund blends efficiency with growth.
Think global, not just local
Diversification isn’t only about asset class; it’s also about geography. While the Indian market may face headwinds, other economies could be on stronger cycles. Allocating even a small percentage to international funds adds resilience.
For example, while the BSE Sensex delivered -0.35% in 2024, the Nasdaq surged 26.54% and the Hang Seng gained 50.31% on China’s stimulus-driven recovery.
Don’t chase last year’s winners
The temptation to buy top-performing funds of the last year is hard to resist. But markets change, and yesterday’s leader may not lead tomorrow. Instead, focus on consistency.
For example, there are flexi-cap funds that have delivered 5-year CAGR in the range of 25 to 29%, with low beta and strong risk-adjusted returns. Even when the BSE 500 Index fell -1.51% in 2024, these funds generated returns in the range of 5% to 6%. That kind of resilience matters more than chasing temporary winners.
Rebalance and review
Even the best portfolios drift over time. A 60:40 equity-debt allocation can become 75:25 after a bull run. Rebalancing once or twice a year helps bring risk back into line.
Multi-asset allocation funds or dynamic asset allocation funds also serve this role. Depending on the macro-economic scenario and valuations, a fund manager dynamically rebalances the portfolio within equity, debt, gold, and silver. There are multi-asset allocation funds and balanced advantage funds that have delivered 5-year CAGR returns in the range of 24% to 25%, proving how active rebalancing works effectively.
Tie every fund to a goal
A portfolio only feels balanced when every fund serves a purpose. Planning for your child’s education in ten years? Choose equity funds with long-term growth potential. Saving for a home in three years? Stick to short-term debt or liquid funds.
For long-term goals, multi-cap and flexi-cap are useful as they spread across large, mid, and small caps. For short-term needs, debt funds provide stability and liquidity.
Keep taxes and costs in check
Returns matter, but what stays in your pocket matters more. Repeated churning attracts exit loads and taxes. For example, selling an equity fund within a year results in a 20% short-term capital gains tax, plus a 1% exit load, which can lead to small leakages that eat into compounding.
Expense ratios must also be tracked, especially in debt and passive funds where high costs quietly erode returns. Smart investors use tax-loss harvesting to offset gains with strategic losses, lowering their tax bills.
Diversification, when done correctly, is a strategy, not duplication. Build your portfolio like a team, not a crowd. That’s how you win the long game of wealth creation.
Note: All mutual fund data and returns are as of 17 September 2025. The funds mentioned above are provided for illustrative purposes only.