Your mutual fund portfolio may be riskier than you think, even if you have changed nothing

You may have invested in the same mutual funds for years and continued your SIPs without making many changes. That does not mean your portfolio has stayed just as safe as it was when you started. Some funds may have grown much faster than others, changing the share of your money exposed to market risks.

There is another problem. Two or three funds in your portfolio may hold many of the same stocks. On paper, you have different schemes. In practice, a large part of your money may depend on the same companies doing well.

Your investment mix can change on its own

Suppose you started with Rs. 5 lakh, putting Rs. 3 lakh in equity funds and Rs. 2 lakh in debt funds. Your allocation was 60 percent in equity and 40 percent in debt.

After a strong run in the stock market, the equity portion grows to Rs. 4.5 lakh, while the debt portion remains at Rs. 2 lakh. Your portfolio is now worth Rs. 6.5 lakh, with nearly 69 percent in equity.

You have not bought another fund, but your exposure to the stock market has increased. If markets fall sharply, the impact on your savings could be greater than you had planned for.

This is why investors need to look at the value of their holdings, not just the names of the schemes they own.

Different funds do not always mean better diversification

Holding several mutual funds can give a false sense of security. A large-cap fund, a flexi-cap fund and an index fund may have different names and investment strategies, but they can still own many of the same stocks.

If those companies face a difficult period, several funds in your portfolio could fall together. Having more schemes does not automatically spread the risk.

Small-cap and sectoral funds can add another layer of risk. They may perform well when their preferred part of the market is doing well, but losses can be sharper when that segment comes under pressure. Investors who have added such funds after seeing strong returns should check how much of their total money is now exposed to them.

Check your portfolio, not just the returns

A fund that has delivered strong returns over the past year may look attractive, but recent performance alone does not tell you how much risk you are taking. Check the fund’s major holdings, the sectors it invests in and how much it overlaps with your other schemes.

Your time horizon also matters. Money needed in the next two or three years should not depend heavily on the stock market. Savings meant for retirement many years away may be able to withstand more short-term ups and downs, depending on your circumstances.

SEBI’s investor education guidance also stresses diversification and choosing an asset mix based on financial goals, risk tolerance and investment period.

When should you make changes?

There is no need to keep buying or selling funds every time the market moves. Instead, review your portfolio periodically and check whether the original balance between equity, debt and other investments still suits your needs.

If equity has grown beyond your intended allocation, you could direct fresh investments towards the underrepresented part of your portfolio or consider rebalancing. Before selling units, check the tax implications and any applicable exit load.

The aim is not to avoid every market fall. That is impossible. It is to make sure your investments are not taking more risk than you can afford, simply because some funds have done better than others.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.