Many financial advisers suggest that systematic transfer plans (STPs) are a better way of investing lump sum amounts in equity funds—invest a lump sum in a liquid fund and transfer a fixed sum to equity funds at fixed intervals. Of course, both these funds have to be from the same fund house. Did you know, they also have to be in the same folio? Let’s say you have investments in HDFC Liquid Fund (HLF; in folio number 123) and HDFC Equity Fund (HEF; in folio number 999) and you want to move money from HLF to HEF. If you think your money simply gets moved from HLF to HEF, you’re wrong. In practice, the fund house makes a new investment in HEF. You will now have three separate investments: the initial HLF in folio 123, a new HEF in folio 123 and the existing HEF continues in folio 999.
This is where consolidation of mutual funds comes in.
Why consolidate
When we build portfolios, we mostly focus on the schemes we buy and ignore how we buy them. Over time, we may buy many schemes from one fund house. If we ignore folio numbers, we could create many folios. This matters because the account statements that fund houses send us are folio-wise. If you have three folios, you will have to manage three account statements.
A better way to manage your mutual fund investments is to consolidate. One way to do this is to try and minimise the number of folios you have with a fund house. Remember, you can only merge folios within a fund house. A folio is like an umbrella over your different mutual fund schemes. You can also think of a folio as a folder in a filing cabinet and your individual schemes stacked up in a folder. The problem is, multiple folios in the same fund house can also arise if we have had multiple distributors. As a distributor can only access details of the folios that she manages—and you can thus have multiple account statements—multiple folios can make it difficult to take a holistic view of your money box.
