With a plethora mutual fund schemes to invest in, individual investors often get trapped in a portfolio overlap. That’s because most of the fund managers would like to have their top holdings in bigger and established companies within large, mid and small-sized categories. And every fund would like to have a share in reliable companies to deliver returns for their investors.
Investing in too many schemes would make it tedious for investors to monitor the performance of the schemes regularly, especially if some of them underperform as compared with their benchmark. So, investing in too many schemes will not help in diversification based on the individual’s long-term financial goals and risk appetite.
How to avoid the overlap?
A good way to avoid it is to look at the overall holding across the mutual fund portfolio. Harshad Chetanwala, co-founder, MyWealthGrowth.com, says usually, it is the top 10 to 15 stocks that matter in the consolidated portfolio. “Diversifying across good funds that do not have very similar portfolios is one way to avoid this overlap. At the same time, creating a blend of funds across market capitalisation can also reduce the risk of overdependence on a few companies,” he says.
Experts say investors should avoid buying too many schemes from the same category, especially in the large-cap space as these have to invest at least 80% of the assets in large-cap companies, as per Securities and Exchange Board of India’s regulations. Moreover, investors must map the exposure of each mutual fund scheme. In case the net allocation of two or more funds in the overall portfolio in a particular sector is very high, they must reconsider the investment weightage.
Vinit Khandare, chief executive officer and founder, MyFundBazaar, says investors must avoid multiple funds being handled by the same fund manager. “A fund manager will devise his strategy based on his views towards sectors and stocks and that would be similar irrespective of the type of funds he manages,” he says and adds that ideally, the investor should limit his exposure to 30% towards a single fund manager or an asset management company.
The risk to an investor’s equity mutual fund portfolio will be more if there is a very high allocation to any one company or a few companies. In such a case, the performance of the mutual fund portfolio will get affected if these companies underperform. “A consolidated portfolio with 25-30% exposure in the top five holdings should be good. At the same time, one can look at top holdings where it could be good to have less than 7%-8% in one company,” says Chetanwala.
Experts say at the portfolio level, it is good to have six to eight funds depending on the portfolio size. The investment can be done across different asset management companies to avoid overdependence on a particular fund manager and fund house. Similarly, diversifying across fund categories based on risk appetite can also help to create a well-diversified portfolio.
Invest light, review regularly
Experts say one of the crucial steps for good money management is to review one’s portfolio regularly. For one, investors must check if the fund allocation is aligned with their goals and the overall risk tolerance is not breached. Along with an extensive portfolio review, investors should also analyse the performance of their investments against their benchmarks to get an insight about the sustainability of the remaining assets and funds.
To ensure proper investment planning, it makes sense to review your investment portfolio at the financial year end, so as to reduce overall tax liability. With regular rebalancing, investors can perpetually adjust their investments to ensure an ideal asset allocation as per their financial goals, which will help them maintain the portfolio risk within comfortable limits.
Khandare says the frequency at which an investor should review his investment portfolio depends on his financial goals and he must always keep an eye on his portfolio and his risk appetite. “Based on the short-term or medium-term goals, the investor must gauge the frequency of the review. Long-term goals may demand reviewing the portfolio once every few years,” he says.
Hedge your bets
Avoid buying too many schemes from the same fund category, especially in the large-cap space
It is good to have less than 7-8% exposure to one company within the top holdings
Analyse performance of your investments against their benchmarks to get an insight about the sustainability of the remaining assets & funds