The COVID 19 breakdown and resulting lockdown had shot the economy, businesses, and financial market hard. The government has taken the necessary steps to revive the economy and bring back things to normal. As financial markets are highly volatile and the experts are expecting more volatility as a resultant of the lockdown. To be on the safer side, experts advise to reshuffle the portfolio and for mutual fund investors, the lockdown will not have an adverse effect. In mutual funds, it is the creation of an easy portfolio that delivers returns at a low cost.
Here’s why minimalism is required and for whom it works
Minimalism in art, music, and society is that the use of the smallest range of materials and therefore the simplest of forms within the creation of something notable. The two big reasons to adopt minimalism are;
- Due to the underperformance of one fund cancels out the alpha or outperformance within the other, this goes against the aim of a mutual fund portfolio, which is to beat the index. Having an oversized number of funds gives returns on a par with what the index gives or below that.
- One needs a lot of time and expertise in managing the portfolio of the many mutual funds. The latter, especially, comes at a value in terms of distributor or adviser fees.
Sometimes an investor lands up switching between mutual funds and incurring cost either in the form of taxes or at a cost term, as funds move according to trend. Technically minimalism can be most effective either in actively managed funds or passive funds. “Minimalist approach works best with passive funds, as in case of active funds the need for diversification across fund houses and strategies is stronger,” said founding partner and head, research, Prime Investor, a mutual fund research platform, Vidya Bala. Passive funds just recreate the index whereas active funds depend upon fund manager skills. Minimalists tend to advocate low-risk liquid funds as there are very few passively managed debt funds. But this does not mean that investors should not consider minimalism in case of active funds. Investors can decide to choose the middle path with a combination of two-three of equity and debt for a portfolio that consists of active funds.
To keep your cost low, try to adopt a simple portfolio. A portfolio of a dozen Mutual Funds will do more harm than good in case if you do not have large sums of money and complex financial needs. The current situation offers a chance to make wise decisions to clean the portfolio as redemptions of excess funds may not attract capital gains taxes.