20 mutual funds, 500+ stocks: Why wealthy investors need a different portfolio strategy
Diversification is one of the most important aspects of portfolio building and management, which helps investors manage risk and volatility in their investments
For investors with around Rs 5 crore, this means looking at the role each investment plays, rather than simply adding schemes
For investors owning more mutual funds does not automatically mean better diversification. A portfolio spread across 20 schemes can result in exposure to hundreds of stocks, while also making monitoring, decision-making and succession more complicated.
Vivek Banka, founder of GoalTeller, said diversification remains an important part of portfolio construction, but investors need to focus on diversifying sources of risk rather than simply increasing the number of schemes.
“Diversification is one of the most important aspects of portfolio building and management, which helps investors manage risk and volatility in their investments. Diversification is essentially the presence of unrelated or inversely related asset classes in one’s portfolio. During times when one asset class is faring poorly, something else would do well, and vice versa, helping balance out the returns while at the same time ensuring one’s investments are not concentrated on one investment or sector.”
The risk, Banka said, is that investors can cross the line from diversification into what he calls “deworsification”, adding investments that increase complexity without materially improving risk management.
“However, while we diversify, it is important that we don’t deworsify a term used casually to refer to an investor who adds more funds, managers and asset classes to a portfolio that doesn’t help reduce risk but actually increases the risk and doesn’t help in diversifying,” said Banka.
The problem with too many mutual funds
As portfolios grow, investors often add more schemes believing this will spread risk. However, different funds can have considerable overlap in their underlying holdings. This means that owning 20 schemes may provide less diversification than it appears to on the surface.
“As a financial advisor, we come across one big mistake in diversification, which is the presence of too many funds in one’s portfolio, which comes with multiple inefficiencies and for let’s say a 5 crore. Investment corpus adds many risks and doesn’t help much in achieving the objective of risk management,” said Banka.
The extent of the potential exposure can be seen in the following basket-level analysis. Each basket contains 20 funds, yet the number of unique stocks runs into several hundred. Across the four baskets, the combined portfolio has 868 unique stocks after eliminating duplication.
Banka said that such a broad collection of stocks can dilute the benefits investors expect from selecting active fund managers, while making the portfolio increasingly difficult to track.
A portfolio of 20 mutual funds would typically mean the investor would be indirectly holding at least a minimum of 500 stocks, if not more, which reduces the portfolio to essentially buying the entire index (Nifty 500) and stem stock picking benefits by any manager.
Beyond stock overlap, there are operational costs. Investors have to monitor multiple schemes, assess fund performance, track changes in fund managers and decide when to exit an underperforming fund. For a large portfolio, these decisions can become cumbersome.
The issue also extends to succession. Experts say, “When investments are spread across a large number of schemes, nominees and heirs may have to identify and consolidate numerous holdings, adding another layer of complexity at a time when simplicity can be particularly valuable.”
Look beyond the number of funds
Banka said investors should instead consider whether their portfolio is diversified across asset classes. A portfolio dominated by equity mutual funds can remain exposed to the same broad market risks even if it contains hundreds of individual stocks.
“In the quest for diversifying the number of funds, investors often miss out the more important step of diversification of asset classes, and we hardly see things like precious metals, international investments, fixed income instruments, etc in their portfolios which actually go much more towards derisking than simply adding more no of funds.”
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For investors with around Rs 5 crore, this means looking at the role each investment plays, rather than simply adding schemes. Equity can remain a core component, but exposure to fixed income, precious metals and international investments may provide different sources of risk and return, depending on the investor’s objectives and risk appetite.
Therefore, one should limit the number of mutual fund schemes while diversifying across asset classes and fund managers.
“Investors would do well to possibly keep themselves restricted to a max of 10-15 schemes, especially with a corpus of 5 crore. And focus on diversifying across asset classes and also managers within these 10-15 schemes ( viz. buy funds that are managed by different fund managers to achieve diversification, as it is highly likely that the same manager will have a similar approach to all their managed funds).”
Investors can avoid ‘deworsification’ by looking beyond the number of funds they own and instead considering whether their portfolio is diversified across different asset classes. Owning too many mutual funds can lead to overlap in underlying holdings, making the portfolio difficult to manage and potentially not improving diversification.
Wealthy investors should consider diversifying their portfolios across asset classes such as precious metals, international investments, and fixed income instruments. Other asset classes to consider include equities, debt, commodities, real estate, private credit, and global assets. Gold, crude oil, and Bitcoin can also be part of a diversified framework.
Limiting mutual funds may not automatically improve investment returns for large portfolios, as owning too many schemes can make monitoring and decision-making more complicated. While investors often add more funds believing it spreads risk, different funds can have significant overlap in their underlying holdings. This can lead to a portfolio that is difficult to track without adding much real value or improving diversification.
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