Having too many large-cap funds not good for diversification
There could be overlap in terms of holdings between the portfolios of various funds
I have systematic investment plans in Franklin India Prima Plus Fund (5,000 since January 2008), HDFC Growth Fund (6,500 since March 2008), Kotak Opportunities Fund (1,500 since April 2008), HDFC Equity Fund (10,000 since July 2008), Birla Sun Life Frontline Equity (8,000 since June 2009), UTI Opportunities Fund (3,000 since July 2009), HDFC Midcap Opportunities (5,000 since July 2010), DSP Black Rock Top 100 Equity (3,000 since June 2011), Reliance Regular Savings Fund - Equity Plan (5,000 since September 2008) and Reliance Equity Opportunities Fund (5,000 pm since September 2008). I have an investment horizon of 8-10 years and my risk appetite is high. Are these funds suitable for long-term needs? Do I need to exit or redeem any fund?
—Akhilesh
You are investing 52,000 a month in 10 equity funds. Seven of these funds are large-cap-oriented and these put together are consuming 71% of your allocation. A multi-cap fund (Reliance Regular Savings fund – Equity) has been allotted 9%, and the remaining 20% is split between two small- and mid-cap funds. You have a 10-year time horizon and you have indicated that your risk appetite is high.
From an asset allocation perspective, having an all-equity portfolio is understandable. There are, however, opportunities in your portfolio to get the allocations between the fund categories right, and in the process, to move to a smaller, better performing set of funds.
At present, you have six funds in the large- and mid-cap category and one in the large-cap category. Such an investment strategy does not yield significant diversification benefits. This is because in this category, the universe of stocks is relatively small resulting in a lot of overlap in terms of holdings between the portfolios of various funds. For example, just three stocks—Infosys Ltd, ICICI Bank Ltd, and Reliance Industries Ltd—make up close to 18% of your portfolio at present since all your funds in this category own them. If you are going to choose multiple funds from a category, it would be better to choose it in the small- and mid-cap category since the universe of stocks here is larger and, therefore, there is less chance of overlap.
Here are some changes you can make to get to a well-diversified set of funds. To start with, you can fold the two HDFC funds into one (HDFC Equity). Since you are already investing in large-cap and mid-cap funds separately, you do not need to invest in a multi-cap fund specifically. That means, you can fold the two Reliance funds into one as well, doubling the allocation to the Equity Opportunities fund. You can add the Kotak fund allocation to the UTI Opportunities fund. With these changes, you’ll have a smaller portfolio with seven funds with a 70:30 ratio between large-cap-oriented funds and small- and mid-cap funds.
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