A concentrated portfolio can backfire badly if the fund manager’s strategy goes wrong
A portfolio with few stocks can fall sharply if share prices of most stocks in that portfolio fall
Mutual fund schemes, typically, diversify across stocks and sectors. The idea behind diversification is that if some stocks and sectors do not do well, then others present in the portfolio that don’t fall by as much, prevent a downslide. But sometimes, fund managers follow a concentrated strategy either due to a scheme’s mandate or because of the fund manager’s style. There are some funds that are mandated to hold fewer stocks, like ‘focus’ funds. These funds typically hold around 25-30 stocks. There are also certain fund managers who prefer to hold concentrated portfolios across many or all of their funds. To put it simply, if a fund manager has high convictions in few stocks or sectors at any given time, she prefers to hold fewer stocks. The rationale here is if these stock prices go up, then the fund’s net asset value tends to rise sharply. But a concentrated portfolio can backfire badly if the fund manager’s strategy goes wrong. A portfolio with few stocks can fall sharply if share prices of most stocks in that portfolio fall. But diversified funds can also hold a concentration of their larger holdings and a much more diversified portfolio among its smaller holdings. Here is the list of funds with the highest concentration of top 10 holdings.