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MUTUAL MONITOR Why you should avoid a shotgun investment strategy. By Dhirendra Kumar
If you have enjoyed investing in mutual fund schemes in, say, the last five years, I would think that the time has come to administer an inventory-check to your portfolio. Because you could just have added scheme after scheme to it over that period of time, finding that easier to do than periodically restructuring your portfolio. But, in the process, you would have ended up being more a collector than an investor. Sure, you could argue that you can never get enough diversity in a portfolio in our markets; that you should diversify into not just one asset-class; that even in each asset-class, you should diversify your fund-managers too True. However, the point I am making is that investing in 20 mutual fund schemes will never be 20 times better than investing in just one. Over extended periods of time, mutual fund schemes of a kind are likely to perform so similarly that they will, in all probability, overlap rather than complement each other. For instance, even a cursory analysis of the portfolios of the Unit Trust of India's (UTI's) many equity schemes reveals that there is more overlap than diversification in them. This is particularly true in our country, where there is a lack of depth in both the equity and the debt segments of the market. In fact, their behaviour in the past three years only lends credence to my pet theory that when one mutual fund scheme goes up, they all go up -- and when one scheme's performance dips, they all dip. Few of them consistently yield good returns in times both good and bad. So, you could eventually end up like the man on the street who wears his trousers with an elastic waistband, a leather belt -- and striped suspenders too. Moreover, if you spread your investment across many mutual fund schemes, the process of tracking them is, in itself, reason enough for you to avoid such a shotgun strategy. Building a portfolio is, thus, a science and an art. For the investor who wants something reasonably conservative -- or for one who can afford to invest in only one mutual fund scheme -- one balanced scheme, with an exposure to 50 different stocks and bonds, should provide sufficient diversification. For the investor with greater leverage and earning-life, the ideal -- which will depend on his investment goals, risk-profile, and time-horizon -- is a value-oriented large-cap fund scheme, an aggressive mid- or small-cap growth fund scheme, and an income fund scheme. You could, if you so desire, add a closed-end fund scheme that is trading at a discount, or even a sectoral fund scheme -- both of which will result in an improvement in your returns. For the investor in the highest income-tax bracket, it may be difficult to contain the number of tax-saving schemes in his portfolio. One way of doing so is through a pension scheme, but your money will then get locked for a lifetime. For the investor who wants income, it makes sense to invest in one bond fund scheme -- at most, two -- in your portfolio. But it is difficult for me to imagine the utility of investing in more than two open-end income schemes since all of them look, more or less, alike. Of course, this ignores the guaranteed-return fund schemes of the UTI and the Life Insurance Corporation which, though structured as fund schemes, are more akin to bank fixed deposits. So, apart from a tax-saving or guaranteed- return scheme, I believe that your portfolio should never consist of more than five mutual fund schemes. In my book, that's, mutually, the perfect number for you and me. |
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How many is too many? When I
last counted, there were as many as 200-odd open- and closed-end mutual fund schemes in
the fray for your money, with more threatening to enter the market every month. 