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Why keep all your eggs in one basket

Multibagger stocks have a much larger positive impact on returns from PMS schemes than MFs

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You must have heard of this advice a number of times while making investments - “Do not keep all your eggs in one basket”.

This is true for diversification across asset classes when one creates an investment portfolio. This is also true when one looks at the merits of investing in mutual funds (MFs) versus a few stocks.

I was talking to my six-year old son once three years back and telling him this whole theory of “not keeping all your eggs in one basket”. His question in response to this set me thinking. He asked me that suppose someone is walking on the road with his just shopped eggs in 4 different bags in both his hands and he stumbles and falls down; would not all the eggs in all the bags possibly break? What is true in real life can be true in investments. When everything goes wrong, when there is doom & gloom, even a well diversified investment portfolio may not stand the test of times.

When it comes to investments by high net worth individuals (HNIs) and ultra high net worth individuals (UHNI), long-time investors who have “been there done that”, the investment mantra may be the reverse. It goes like this “keep all your eggs in one basket and watch the basket carefully”.

Portfolio concentration instead of diversification is not for all; it is certainly not for the faint hearted but when experts and experienced investors take a few high conviction concentrated investment bets, the results are magnificent with sky high returns.

For now, let us take out of the equation the stock market gurus who have made crores through such strategies and let us focus on an investment vehicle called PMS, short for portfolio management services. I will give you the main differentiating factor between equity PMS & equity mutual funds -

Many mutual funds are over diversified with 40-50 stocks in their portfolios with no stock being more than 5 % of the portfolios. Equity PMS fund managers generally invest in anywhere between 8-20 stocks and have no such 5% limitations. (BTW -Warren Buffet’s magic no. for ideal no. of stocks in the portfolio is 18). The benefit of this is that multibaggers (stocks which give more than 100 % returns) have a much larger positive impact on returns from PMS schemes, unlike MFs, where there are upper limits of stock holdings

The practical factor to consider here is that with a much lower no. of stocks in the portfolios, PMS fund managers can have much more focus on these “few eggs in their basket” and can watch them carefully. They actually have many more value-adding interactions with the management of these few high conviction stocks as they keep on investing more & more in them instead of over diversifying, something that can happen in a mutual fund.

Should you invest in an equity PMS or plain vanilla mutual funds is a question that you need to answer yourself. However, here are three basic guidelines:

Why equity - equity investments are for the strong hearted as your investment capital can get wiped off in a few days. At the same time, the returns are the highest possible. In the coming 5 years, one can “make hay while the sun shines” and take advantage of the expected bull market in the stock market.

How much – The basic thumb rule for anyone is the age old formula

Equity - 100 minus the age. For example if your age is 35, your equity portfolio should not be more than 65 % of your overall investment portfolio.

(3) How much PMS - The minimum investment required in a PMS product is Rs 25 lakh and I will advise only those investors to go there, who have another Rs 75 lakh in equity mutual funds or stocks, thereby making this equity PMS investment not more than 25 % of your equity portfolio.

Finally, whether you keep all your eggs in one basket, a few baskets or many baskets, it is important o watch these baskets, not everyday but atleast once in three months just to monitor whether your investments are performing in line with your expectations and the goals for which you have made these investments in the first place.

ALL IN ONE

  • Equity investments carry risk of getting investment capital wiped off, but also offer hefty returns
     
  • Multibagger stocks have a much larger positive impact on returns from PMS schemes than MFs

The writer is CEO, Karvy Private Wealth

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