Too many mutual funds in your portfolio? Here is how to simplify it without paying unnecessary tax or exit loads

At some point, almost every investor ends up with too many mutual funds.

It usually happens slowly. One fund suggested by a friend. Another during a market rally. A third because it was trending. Add ELSS for tax saving, a couple of SIPs started years ago, maybe some NFOs, and suddenly you are tracking 12 or 15 schemes without even realising how you got there.

The problem is not just clutter. It becomes harder to track performance, asset allocation gets distorted, and you may end up holding multiple funds that invest in the same stocks. Cleaning this up makes sense. But doing it carelessly can cost you in capital gains tax and exit loads.

Here is how to do it sensibly.

First check for overlap and duplication

Before redeeming anything, look at what you actually own.

If you hold three large cap funds, chances are their top 10 holdings are very similar. The same applies to flexi cap or mid cap funds. Keeping multiple funds in the same category rarely improves returns meaningfully. It just spreads your money thinner.

Identify which funds have consistent performance, reasonable expense ratios and a clear role in your portfolio. The rest become candidates for exit.

Understand exit loads before you redeem

Many equity funds charge an exit load if you redeem within one year. Some debt funds also have short exit load periods.

If you are just a few weeks away from completing the exit load period, it often makes sense to wait. Paying 1 percent as exit load on a large corpus just to tidy up early is not efficient.

Check the exact exit load clause in your fund factsheet before making any move.

Plan redemptions around capital gains tax rules

Tax is where most investors lose money while cleaning up portfolios.

For equity mutual funds, gains are classified as short term if held for less than one year and long term if held for more than one year. Short term capital gains are taxed at 15 percent. Long term capital gains above the annual exemption limit are taxed at 10 percent.

If your holding is close to one year, waiting may significantly reduce tax.

Also remember that long term capital gains up to the exemption limit in a financial year can be tax free. You can use this strategically by spreading redemptions across financial years rather than exiting everything at once.

For debt funds, taxation depends on current rules and holding period. Make sure you calculate the post tax impact before redeeming.

Consider switching instead of redeeming where suitable

If you want to move from one scheme to another within the same fund house, a switch transaction is possible. But remember that for tax purposes, a switch is treated like redemption and fresh purchase. Capital gains tax still applies.

So do not assume switching avoids tax. It does not.

Consolidate gradually, not in one shot

There is no urgency to reduce 12 funds to 4 in one day.

You can stop SIPs in underperforming or duplicate schemes and redirect fresh investments into your chosen core funds. Over time, their weight will reduce naturally.

For existing holdings, stagger redemptions in a tax efficient way. Align them with your asset allocation goals so that equity debt balance is not disturbed suddenly.

Keep it simple going forward

After consolidation, define a structure. For most long term investors, a combination of one or two broad equity funds, one international or thematic exposure if needed, and suitable debt allocation is enough.

More funds do not automatically mean better diversification. Often, it just means more confusion.

Cleaning up your mutual fund portfolio is less about chasing returns and more about discipline. Done thoughtfully, you can simplify your investments without giving away money in exit loads or unnecessary tax.