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Business News/ Money / Q&a/  I have nine funds in my equity portfolio. Am I over-diversified?

I have nine funds in my equity portfolio. Am I over-diversified?

Q&A regarding over diversification of equity portfolio

Overdiversifying equity portfolioPremium
Overdiversifying equity portfolio

I am investing 1.06 lakh every month in nine funds, including 55,000 in active funds and 51,000 in passive funds. The active funds are ICICI Pru Blue Chip ( 12,000), HDFC Top 100 ( 2,000), HDFC Mid Cap Opportunities ( 13,000), DSP Mid Cap ( 7,000), Kotak Small Cap ( 5,000), and ICICI Pru Multicap ( 16,000). The passive funds are ICICI Pru Nifty Index ( 14,000), ICICI Pru Nifty Next 50 Index ( 17,000), and UTI Nifty Midcap 150 Quality 50 Index ( 20,000). My investment horizon is 15-17 years. Am I over-diversified and do I need to make any changes??

—Name withheld on request

Overall, there is good diversification across a fair number of funds. Given your long-term horizon of 15+ years, your aggressive portfolio that is all equity is understandable. However, for reducing volatility and ensuring downside protection, you can introduce a debt component to the portfolio. So, unless you have substantial debt investments outside of these funds (like fixed deposits or PPF), you can de-risk a bit by adding HDFC Corporate Bond Fund for about 15-20% of your portfolio (you can replace the multi-cap fund with this).

Also, there is a high allocation to very risky funds (such as mid-, small-, and multi-cap). While recent markets have not shown it much, mid- and small-cap categories tend to fall more and will take longer to recover from such corrections. For example, the Nifty Smallcap 250 is yet to recover to its earlier peak while the Nifty 50 is hitting new highs. This would be another reason to replace the multi-cap fund with a lower-risk debt fund.

Among the large-caps, allocation to HDFC Top 100 can be moved to the Nifty Index Fund since large cap funds are having a hard time beating index funds and that is likely to persist. In terms of mid-caps, the quality index fund is a new one. The historical index data that is there has been back worked, and based on this, the index has delivered better.

However, from what we have seen in other factor indices, many of them have differed when it comes to real-time market performance. So, you would need to keep an eye on the performance of this fund.

Strategy-wise, the portfolio is tilted towards value but at this time it is fine. You can look to add some growth-style funds later on if you want to modify the portfolio.

Srikanth Meenakshi is co-founder at PrimeInvestor

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Updated: 22 Dec 2022, 12:31 AM IST
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