Investing In Mutual Funds? Diversify But Avoid Duplication
Building an efficient mutual fund portfolio is a difficult task. But the general perception does not recognise this fact. Most retail investors follow a simplistic process. They sort mutual fund schemes based on their past performance and pick better-performing schemes for investment. Hindsight investing is fraught with its own risk and it further gets complicated by adding too many schemes in the name of diversification. A study of 30 open-ended schemes’ portfolio shows that they invest in 1,790 stocks in total, out of which there are only 552 unique stocks. It means there are 1,238 stocks that appear in the portfolio of two or more schemes. This is in effect means you are owning the market and any meaningful out performance over the index is a pipe dream. When one invests on the basis of past performance without understanding the underlying approach or style, there is a high possibility that the investor may end up buying schemes that are managed in a particular style - growt...
