Stocks with fewer quantities demonstrate superior returns?
In the dynamic world of mutual funds, the relationship between the number of stocks in a fund's portfolio and its performance is a topic of great interest. A recent analysis delved into four mutual fund categories: large-cap, mid-cap, small-cap, and flexi-cap, shedding light on how the balance between diversification and concentration risk affects each.
The study found that large-cap funds, which typically invest in established companies, perform well when they maintain a balance between diversification and excessive holdings. For instance, large-cap funds with up to 50 stocks had a higher average rolling return (13.51%) compared to those with 50-75 stocks (13.05%).
Mid-cap funds, which focus on smaller and mid-sized companies, often hold more stocks to capture growth opportunities. However, the risk tends to be higher. The analysis revealed that mid-cap funds with up to 50 stocks had a higher average rolling return (17.39%) compared to those with 50-75 stocks (16.69%) and 75-100 stocks (14.55%).
Flexi-cap funds, which dynamically shift their allocation between large, mid, and small-cap stocks, showed a different trend. While no flexi-cap funds had 75-100 or over 100 stocks in their portfolio, those with up to 50 stocks had higher average rolling returns (15.87%) compared to funds with 50-75 stocks (14.69%).
HDFC Large and Mid Cap Fund, a flexi-cap fund, bucked the trend by performing well despite holding around 170 stocks in its portfolio. Similarly, Nippon India Small Cap, a flexi-cap fund, had over 190 stocks in its portfolio but was the best-performing small-cap scheme by the end of October 2023.
The study emphasised that while increasing the number of stocks in a fund's portfolio generally improves diversification and can reduce risk, beyond a certain point, it results in overdiversification. This does not necessarily enhance performance and may complicate portfolio management.
It's crucial for investors to monitor the performance of a scheme if the number of stocks in its portfolio increases consistently. A detailed health checkup of your portfolio can be obtained for free on our platform App to avoid hidden risks and identify underperforming funds. If a scheme starts to underperform its peers consistently, it may be time to consider changing your fund.
The performance of a mutual fund depends on multiple factors, including stock selection, allocation strategy, market conditions, and investment discipline, beyond the sheer number of stocks held. As always, it's advisable to conduct thorough research and consult with a financial advisor before making investment decisions.
- In the realm of finance, investing in mutual funds, particularly flexi-cap funds like HDFC Large and Mid Cap Fund, requires careful consideration, as their performance may not necessarily improve with an increasing number of stocks in their portfolios.
- For business savvy individuals who are keen on mutual funds, it's essential to regularly monitor the performance of their investments, even if they hold a large number of stocks, to ensure they are not exposed to hidden risks or underperforming funds.
