More of anything may seem fun and exciting. However, it’s commonly said and heard that ‘too much of anything is bad’. Not only having too much of anything can be difficult to manage; it can also be mind-boggling. In the mutual fund space too, for both the investor and the mutual fund house; having lesser schemes becomes relatively simpler to make decisions and manage. To provide a solution, the regulator has now stepped in to make progressive reforms.
Paradox of choice: From a new investor’s point of view, having to choose an ideal fund from over 2000 funds offered by 43 Mutual Fund houses is a very difficult task. This is similar to a customer stepping in a store looking for something specific and then he/she ends up in picking almost everything and many a times, whatever that’s been purchased is not even of much use or irrelevant. The investor too; can get flummoxed looking at the variety and yet after making a decision can still doubt on it and if it doesn’t work well for the investor, they can later apprehend from investing any further
Focus enough to master and make things simple: Now if there are fewer, focused options to choose from, it is a less tedious task for you to make the right pick. It is easier as clearly defined array of sharply differentiated alternatives are provided. The core concept of selecting a mutual fund scheme should not be based upon spotting the differences but on how a particular mutual fund scheme is in sync with your financial goals, risk appetite, investment horizon, etc.
If you buy the market, you can’t beat the market: Over-diversification can adversely affect your equity portfolio. An investor who opts to include a bunch of 8-10 mutual fund schemes which are equivalent to over 300 unique stocks, ends up owning 88% of the market. For you to achieve your financial goals, you would need to appropriately diversify amongst the available mutual fund schemes but duplicating schemes into your portfolio will cease to make any valuable contribution in your wealth creation journey. The most convenient way to achieve optimal diversification and reflect the right investment universe is by investing in one scheme per category that consist of not more than 20-25 stocks so that you avoid duplication of schemes in your equity portfolio
Ensure a level-playing field: Speaking of duplication of schemes, the regulation states that there should be one scheme per category to consolidate and rationalise the number of funds a mutual funds house is offering. This is to ensure a clear and hard-bound definition of categories and schemes for both the investors, intermediaries and the fund houses. To state an example, there are two large cap funds, each offered by two different fund houses. Here, the portfolio one scheme consists of the top blue-chip companies, while the other consists of a combination of blue-chip as well as emerging stocks. The fundamental error observed in this comparison is that though both the funds are categorised under large cap; don’t consist of large-cap stocks entirely.
Beat the benchmark: Taking cue from a school’s ideal teacher to student ratio of 1:20, a similar scale is expected from a mutual fund house where it is ideal to have one fund manager per scheme so the research analysts can fully concentrate on one portfolio and its performance. It is vital for their funds to perform well, beat the benchmark and deliver phenomenal returns.
HONING FOCUS
- Diversify amongst the available MF schemes but avoid duplication
- Focus on how a scheme is in sync with your financial goals
The writer is senior vice president-fund manager, Motilal Oswal Asset Management Company
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