(This article was first published in The Economic Times.)
Ajoy Chomaal wanted to have a ‘diversified’ portfolio of equity funds. So the Mumbai-based entrepreneur kept investing in different schemes from various fund houses. At one point, Chomaal had SIPs running in 18-20 equity funds. “Someone would mention how a particular fund had done well and I would invest in it to diversify my portfolio,” he says.
A lot of investors harbour this misconception. They think holding a large number of funds diversifies their portfolio. That’s a fallacy, because all it does is make the portfolio difficult to monitor. “Funds have 50-70 stocks in their portfolios, so it doesn’t make any sense to have too many funds,” says Tarun Birani, Founder & CEO, TBNG Capital Advisers.
There is another reason why too many funds won’t lead to diversification. In some categories (such as the index fund and large cap category) the portfolios of the various funds are not very different. The percentage allocation may differ slightly but the funds will essentially be investing in the same basket of stocks. If you invest in three large-cap funds, your portfolio will not be very different than if you had invested in just one of those funds.
Experts say that if you really want to diversify, spread your money across 4-5 funds from different categories of equity funds. “A portfolio of equity funds should be a mix of schemes from different categories,” says Harshvardhan Roongta, Principal Financial Planner, Roongta Securities. For instance, if you are an aggressive investor, you can allocate 60% of your portfolio to mid-cap funds, 20% to multi-cap funds and 20% to large-cap funds. In such a scenario, two mid-cap funds, one large-cap fund and one multi-cap fund would suffice.
Apart from diversifying across market capitalisation, investors can also diversify across investment styles. Fund houses have different investment styles and your portfolio can benefit from the expertise of different fund management approaches. Experts feel a portfolio of 4-5 funds of different market capitalisations and investing styles would provide adequate diversification across assets, sectors and stocks.
(In Pic: Ajoy Chomaal)
Investing goals: Daughter’s education and marriage.
At one time, this Mumbai-based businessman had SIPs running in almost 18-20 equity funds. He pared that number down to seven funds following advice from a financial planner.
How that has helped
*Higher overall portfolio returns.
*Easier to monitor funds and review the portfolio.
Fewer funds, better returns
It may sound surprising, but having fewer funds can also push up the overall returns of the portfolio. That is because the investor is able to monitor the portfolio and take corrective action whenever required. Financial planners say that one should review the portfolio every year. The more funds you have, the more difficult it will be to monitor them weed out the underperformers.
Ahmedabad-based Raja Mehta knows this only too well. Till a few years back, he was holding close to 14 equity funds. While one of his funds gave exemplary returns of nearly 80%, he had too little of his portfolio allocated to this winner. Consequently, its outperformance didn’t contribute significantly to the portfolio’s overall returns. It made Mehta realise that he needs to reduce the number of funds in his portfolio. He now has only three funds.
(In Pic: Raja Mehta)
Investing goals: Daughter’s education, retirement
Till a few years back, this Ahmedabad-based entrepreneur was holding 14 equity funds. Unable to track their performance, he has reduced his portfolio to just three funds.
How that has helped
*Easier to track progress of goals
*Less paperwork to manage funds
Consolidating the portfolio
Too many funds also means the investor does not know where he stands. Bharat Joshi has 17 funds in his portfolio and has no idea how his funds are doing. Last month, he wrote to us seeking advice from the Portfolio Doctor. Vidya Bala, Head of Mutual Fund Research at Fundsindia.com, has a simple prescription: reduce the number of funds and consolidate your portfolio. Above all, stop investing in new mutual fund schemes.
One easy way to monitor the portfolio is by using the online portfolio tracker facility offered by some financial portals. Just key in your portfolio details and start tracking your funds.
Value Research has made things very easy for investors. All you need to do is upload the consolidated account statement. The historical transaction data will automatically get uploaded and tell you how your portfolio has done.