Too many schemes spoil portfolios

Mutual Funds | admin | October 24, 2011 at 5:03 am

Keeping track difficult beyond a point; even overall performance likely to suffer.

Hoarding of similar mutual fund schemes is a common malaise, says mutual fund advisor Hemant Rustagi, CEO of Wiseinvest Advisors.

"They (those who do so) feel more schemes imply more diversification. They are limiting their returns. These schemes hold similar stocks and can suffer the same fate, if these stocks get hit," he says. Many investors, he adds, have 50-100 schemes in their portfolio.

Most equity diversified schemes hold the same stocks and sectors. So, if you are invested in, say four schemes, they could all be holding blue-chips such as Reliance, Infosys, Maruti Suzuki, ICICI Bank, State Bank of India and so on. According to Value Research, 298 funds hold ICICI Bank among their top 10 investments, 268 have Infosys, 279 have Reliance, 257 have SBI and 229 have Tata Consultancy Services.

In these circumstances, if you have 50-70 per cent of the portfolio in schemes with similar stocks, one could take a hit if these suffer. Even the returns of your portfolio are limited by these stocks.

"Investing in multiple schemes with similar objectives, investment style and market-cap segments may lead to having the same underlying stocks, sectors or assets in your portfolio. If the underlying stocks or sectors in a mutual fund scheme start to fall, a high level of diversification may not help the investor's portfolio," explains Jaideep Bhattacharya, chief marketing officer at UTI Mutual Fund.

Performance of the portfolio could also be hit when you have similar schemes of the same fund house. Though the Securities and Exchange Board of India had asked MF houses to merge schemes, many still have quite a few similar ones. Being invested in similar schemes of the same fund house, which in some circumstances could have the same fund manager, could hurt returns.

Typically, a retail investor with a 70:30 equity to debt portfolio should have around 25 per cent in pure large-cap equity diversified schemes, another 35 per cent in good multi-caps and 10 per cent in sector funds, mid-cap or opportunity. In other words, the 10 per cent part should be the aggressive part of portfolio.

Fund advisors say if one is investing Rs 10 lakh with a 70-30 equity to debt ratio, the 25 per cent allocated for large-cap funds should be put in only two schemes, 35 per cent should be in three schemes and the last 10 per cent should be in two schemes.

Similarly, the debt part of the portfolio also needs to have a cap on funds.

"There are several broad categories in which you should invest if you want to diversify. So, include large-cap, mid-cap, equity diversified, balanced funds, monthly income plan, an exchange traded fund and an ultra short-term fund," says Vicky Mehta, senior research analyst at Morningstar. He recommends fewer funds because a fragmented portfolio makes it difficult for the investor to track the investments.

Source: Sify.com