We are running a series of 8 episodes to clear the picture on things that create confusion in the way of investing in mutual funds. In the first episode, diversified funds or sector schemes discussed. Today, know about diversified holdings or concentrated portfolio .
Focused funds are good at the rally, while diversified funds better afford to fall. We all know that diversification helps in reducing risks to mutual funds. They divide their investments into several companies and sectors. This is because when some stocks in the portfolio fall sharply, then its impact remains limited. However, the diversification scope of different funds is also different. While some schemes hold more than 50-60 companies in their portfolio, the other schemes prefer to have a compact portfolio of 25-30 shares.
Fund managers of schemes with concentrated portfolio argue that this gives them an opportunity to make bigger wages in those stocks, whose good performance is more trustworthy and thus they can take advantage of the fasting of these shares. There diversified funds that do not invest more in their top picks, and in such cases, even if such stocks climbing, its impact limited overnight returns.
Profit losses of debt mutual funds
There lot of diversification in the sense that the fund manager not getting too much confidence in the selected stocks. Finally, it comes to the point where an investor willing to take the risk and how much he expecting from his investment. Focused funds with good management often give more returns during the market rally, but diversified funds do better in protecting the portfolio when it falls in the market.
Renu Potten, Research Head, Apollermment Research, said, “Those investors who can take the risk of moderate risk, the focused strategies are better for them. For such investors, market volatility like a common roller coaster ride. They secure their surplus safely these higher risks but with higher return funds. ‘
There is no such evidence, which will show that whose performance better in the long term, but well diversified funds are less voltile. Investors should keep core holdings in diversified funds and some allocation should done in concerted funds as a complement.