A widely diversified portfolio is usually advocated over concentrated portfolios. This is because the asset allocation strategy by way of diversification has quite an established track record. However, if the concentrated investment makes a small portion of your overall portfolio, it does make reasonable sense and could be worth considering. A certain portion of a portfolio as concentrated one acts more like a satellite investment around your core portfolio and adds value to your wealth creation process.
Investment in equity mutual funds through a systematic investment plan (SIP) is one of the best and easiest ways to create long-term wealth from stock markets. It is advisable to choose equity funds depending on one’s risk appetite and investment horizon. Since there are different kinds of funds, which may not be suitable for all investors, one must exercise caution before selecting schemes.
Several fund houses offer equity schemes with a concentrated portfolio with a belief that too much diversification may eat away the achievable returns. At times such an investment proposition may turn out to be more than rewarding but the opposite could also be possible. If you want to invest in such schemes, here is what you need to know and how to go about such investments.
What Is A Concentrated Portfolio?
An equity scheme with a concentrated portfolio is a fund that has very few high-conviction stocks in its portfolio. The number of companies the scheme would be invested in at any given point of time could be as low as 20. Further, an equity scheme focused on only one sector or theme is also categorised as a fund managing a concentrated portfolio as they have a limited scope for investment. Typically, such schemes are highly risky but extremely rewarding at times. Schemes with names like focused, select or sectoral and thematic funds run a concentrated portfolio.
Who Should Opt For Such Schemes?
Equity schemes running a concentrated portfolio have a very narrow investment universe, so they don’t offer the benefit of desired diversification to investors. However, that does not make it an investment you should neglect altogether. Schemes with limited space to create portfolios may not be suitable for all investors. But investors who have a long-term investment horizon with a high-risk appetite can consider schemes with concentrated portfolios. One needs to ensure that not more than 15-20% of the overall portfolio should find its place in concentrated portfolios. Investment through SIP mode should be preferred in such funds. However, at times when the value of portfolio cracks, say 5-10%, you should look for additional purchases to make the most of the fall as such an investment strategy averages out your cost of investments.
Who Should Not Invest In Schemes With A Concentrated Portfolio?
New investors should avoid concentrated funds as their first choice. Instead, they should always start with diversified large-cap and multi-cap funds. Investors who have moderate to low-risk appetites can also stay away from such schemes. Further, those with a short-term investment horizon, say less than five years, should not try their hands at schemes with concentrated investment portfolios. Besides providing handsome returns, a good portfolio should also have the resilience to market crashes and the ability to reduce the downside risk as much as possible. A scheme with concentrated investment may not satisfy this criterion at times and could turn out to be a painful experience for investors who came with a short-term investment tenure.
Equity mutual fund schemes running concentrated portfolios have their advantages and disadvantages. There is no harm in opting for such funds if your risk-taking ability is on the higher side. However, investors with a high or low risk appetite should ensure the quantum of investments in such categories of funds does not exceed 20 per cent on the higher side. Seasoned investors who are experienced and have seen several market cycles should be comfortable with schemes having concentrated portfolios.
Investors should read the scheme related documents before making an investment choice. This would help them get a fair idea about the schemes’ mandate and the fund houses’ thought process and the reason behind the conviction in the stocks the scheme is investing in. You may also seek the help of your financial advisor before investing.
(The author is CEO, Bankbazaar.com)