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Smart vs Cluttered Portfolio
November 1, 2012

This article is a brief write-up on the Ideal Portfolio vs Over Diversified Portfolio.


Author : Renu Pothen



My Take Smart vs Cluttered Portfolio
My Take1
A PhD in Economics, Dr Pothen flagged off her career as an academic associate with the Indian Institute of Management, Ahmedabad followed by a stint at Pioneer Investcorp Ltd. In her current position, she heads Research at Fundsupermart.com.

I have always maintained that investors should not put all their eggs in one basket. The reasoning behind this opinion is not only from a diversification point of view, but also to avoid concentration of risk. However, at times when I review client holdings, I come across portfolios which have ~ 25-30 funds with 3 -4 funds from the same category and also from the same fund house. Sadly by the time investors realize that they have been taken for a ride, it is too late.

There is no scientific number for the total number of funds that an investor can have in his portfolio. But my view is that if investors have ~ 8-10 good funds from different categories, it should be sufficient enough to achieve his long term goals. However, the selection of funds should depend on his goals, time horizon, risk appetite, etc. Finally, investors must review their portfolio on a regular basis and take appropriate action if a fund shows consistent underperformance. Let me explain what I mean by a consistent underperformer: Let’s say, an investor buys a midcap fund and the fund does not perform for 2 years. This time period can be taken as the phase during which the market is in a downward trajectory. Midcap funds are usually known to be star performers when Dalal Street is in a party mood. Hence, when the midcap fund does not perform even when markets enter the bullish phase, investors need to take a deep breath and act appropriately.


I am presenting here the results of an ideal and an over-diversified portfolio which an investor had taken exposure to, 3 years back:

Table 1: Ideal Portfolio

Scheme Name Amount Invested on 30 Oct 2009 Current Value as on 30 Oct 2012
ICICI Prudential Focused Bluechip Equity Fund 2,00,000 2,78,100
Mirae Asset India Opportunities Fund 1,00,000 1,39,633
UTI Opportunities Fund 1,00,000 1,40,507
HDFC Mid-Cap Opportunities Fund 1,50,000 2,38,124
IDFC Sterling Equity Fund 1,00,000 1,47,611
ICICI Prudential FMCG Fund 1,00,000 2,06,825
Pinebridge Infrastructure And Economic Reform Fund Standard Plan 1,00,000 1,10,007
Reliance Pharma Fund 1,00,000 1,80,659
Birla Sun Life Dynamic Bond Fund 50,000 63,468
Total 10,00,000 15,04,935

Table 2: Over-Diversified Portfolio

Scheme Name

Amount Invested on 30 Oct 2009

Current Value as on 30 Oct 2012

DSP BlackRock Top 100 Equity Fund

40,000

49,065

HDFC Top 200 Fund

40,000

50,229

Reliance Vision Fund

40,000

45,955

Reliance Equity Fund

40,000

40,083

Sundaram Growth Fund

40,000

45,652

Sundaram Select Focus

40,000

43,640

DSP BlackRock Opportunities Fund

40,000

47,965

HDFC Equity Fund

40,000

51,728

Reliance Regular Savings Fund Equity Option

40,000

50,530

Magnum Multicap Fund

40,000

43,847

UTI Equity Fund

40,000

54,044

UTI Opportunities Fund

40,000

56,203

HSBC Midcap Equity Fund

40,000

40,174

HSBC Small Cap Fund

40,000

43,975

Reliance Growth Fund

40,000

48,822

SBI Magnum Global Fund

40,000

58,701

Sundaram S.M.I.L.E. Fund

40,000

44,133

Tata Equity P/E Fund

40,000

48,728

Templeton India Growth Fund

40,000

49,279

DSP BlackRock India T.I.G.E.R. Fund

40,000

41,896

Pinebridge Infrastructure And Economic Reform Fund Standard Plan

40,000

44,003

SBI Infrastructure Fund Series I

40,000

33,669

Tata Infrastructure Fund

40,000

38,455

Magnum Balanced Fund

40,000

48,040

Birla Sun Life Dynamic Bond Fund

40,000

50,774

Total

10,00,000

11,69,589

Here are my observations on Table 2:

  • • Largecap Funds (6),Multicap Funds (6),Midcap and Smallcap Funds (5),Value Funds (2),Sector Funds-Infrastructure Funds (4),Debt Fund (1),Balanced Fund (1)

  • • The investor has ~ 2 funds in similar categories and that too from the same fund house.

  • • All sector funds are concentrated in the infrastructure space, which is a huge risk that the investor is taking.

  • • The total amount of investments in 6 large cap funds as on Oct 30,2009 is INR 2,40,000.Currently the value of this portfolio is  INR 2,74, 624.However,instead of 6 funds, if the investor had taken an exposure to one single largecap fund,i.e. ICICI Prudential Focused Bluechip Equity Fund, then the current value would be to the tune of INR 3,33,720

The above tables should serve as food for thought for both investors and fund houses alike.

 


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