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When investing in mutual funds schemes the best way to approach is to create a portfolio. By creating a portfolio, the much-needed diversification is achieved. Diversification spreads the risk and avoids the concentration losses of a portfolio.
When investing in mutual funds schemes the best way to approach is to create a portfolio. By creating a portfolio, the much-needed diversification is achieved. Diversification spreads the risk and avoids the concentration losses of a portfolio. The basic portfolio could be achieved by having an exposure of a large cap fund, a mid-cap fund, a small cap fund and a balanced fund. This covers across the breadth of the stock market while the balanced fund would allow a bit of exposure into the debt market also. Further one could add a multi-cap fund and a thematic fund to add flavor to the portfolio.
To achieve balance and the diversification right is not easy. The proportion of various funds should be in-line with the individual investor’s objectives. Also, the portfolio should be in sync with the market conditions to generate better returns. This is not an easy exercise and needs a detailed effort. To ease this whole process, some of the fund houses have come with a strategy of portfolio creation by offering through mutual fund portfolio management services.
This not only allows the money to be exposed at various levels of the market but also is adjusted or churned according to the market conditions. This makes the diversification to the investor’s advantage while actively managing a passive investment like mutual funds. As this is done by the fund house itself, the professional money management skills come into play and reduce the chances of investors’ reaction to the market volatility. The active management helps to have exposure to upcoming trends that could provide additional possible returns.
There is a confusion, however, across investors if the diversification could be within the same fund house. I’ve just outlined the various advantages of using the fund house promoted MF portfolio but let’s also see the possible pitfalls in opting for such a product offering.
Most of the fund houses share a common investment philosophy which could form the basic framework at managing various in-house funds. Also, the fund house derives the investment strategy from the same pool of research team or reports which could have a homogeneous mindset, an exact opposite of variation one is looking for. So, if a fund house bets on a future trend which doesn’t pan out as such then the concentration risk would adversely impact the overall investment. Moreover, any high-profile exits of management i.e. fund manager could have a direct impact, at least, on the immediate to medium term and negatively impact the investment performance.
Going by the very definition of diversification, the spread of risk is better if the funds are picked from various fund houses.
Though, one should be still aware of not over-diversifying to spread the risks as that would dilute the investments and thus thin the returns. Also, the current regulation changes brought by SEBI have allowed the investors to pick and compare across the funds through the categorization. In addition, the diversification across the fund houses would add a bit of flavor to the portfolio and possibly supplementary returns within the same category.
(The author is co-founder of “Wealocity”, a wealth management firm and could be reached at knk@wealocity.com)
K Naresh Kumar
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