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Experts always tell investors to invest in a diversified portfolio. Still, some prefer to commit their money to a handful of bets. Sure, owning a concentrated portfolio has its own benefits. If you are bang on target, the returns could be stupendous. There are some mutual fund schemes such as DSP Blackrock Focus 25, ICICI Prudential Focused Bluechip Equity Fund (IPFBE) and so on — which offer investors a chance to invest in a concentrated portfolio, consisting typically around 25 stocks. Some of them have been around for more than three years and they collectively manage around . 4,000 crore. Though ICICI Prudential Focused Bluechip Equity Fund (IPFBE) among them has delivered superior returns in the last three years, as a category these funds are a mixed bag. That means you have to be really careful about them. Some of the funds could not align their portfolios with the extremely volatile markets over the last four years and underperformed the broad markets. But funds such as IPFBE that stick to quality blue chip stocks should continue offering superior returns in the long term.
How They Work ?
These are large cap-oriented schemes and are benchmarked against either the Nifty or the Sensex. Fund managers handpick stocks from the universe of stocks allotted to them. Most funds use fundamental analysis to choose stocks whereas Religare Agile Fund employs a mathematical model to select stocks. Put simply, each fund runs a portfolio of 'high conviction stocks' that aims to earn returns over and above the market returns. Most of these schemes hold less than 25 stocks, half that of Nifty, compared to typical 40 to 100 stocks owned by their diversified counterparts.
Why Concentration ?
The primary aim of diversification is to bring down the risk. But too much of diversification can backfire. While diversification is needed to reduce risk, after a certain point, adding more stocks to the portfolio does not reduce risk by a great extent but may end up diminishing returns. Though there is no unanimity on what is an ideal diversification, many investment experts believe that a diversified portfolio should comprise 25 to 30 stocks. Anything more than that could be a case of over-diversification. Diversification across asset classes is a must for investors, but in an asset class one can invest in select opportunities. Equity mutual funds with mandate to run concentrated portfolios aim to do just that.
Risk & Returns
A common perception towards concentrated equity portfolio is that 'it must be rather risky'. But the reality is different. Most of these funds have managed to contain volatility, measured by standard deviation, well below the volatility in Nifty. Some funds in this category, such as those from ICICI Prudential and DSP BlackRock, have a decent sectoral diversification, albeit it is lower than other diversified equity funds. The best among the lot — IPFBEF delivered 30.99% against Nifty returns of 23.79% over three years
Should You Invest ?
Though these schemes have shown lower volatility in the past, the risk involved is higher than the diversified equity funds because of the limited number of stocks in portfolios. Investors willing to take more risk than that associated with diversified equity funds to generate superior returns in long term can invest in these funds. Simply put, these schemes are not suited for you if you are risk-averse or a neophyte in the stock market. Such investors should stick to a well-established diversified scheme. This is because a scheme with concentrated portfolio may underperform even if one of the bets goes wrong.
How To Choose ?
Choose a fund that sticks to a clearly defined mandate and has risk mitigation techniques in place. A clear mandate ensures that the fund manager does not venture into undesired bets. If the fund house does not tell you the stock selection process of the fund, just do not invest.
Risk mitigation techniques such as cap on sectoral exposure, strict adherence to the stock selection process, adherence to large-cap liquid stocks are much more important when it comes to these funds. A well defined risk management policy surely helps. Funds with clear investment objective and efficient risk management processes should deliver returns for investors in the long run.
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Invest in Tax Saving Mutual Funds ( ELSS Mutual Funds ) to upto Rs 1 lakh and Save tax under Section 80C.
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Some of the best Tax Saving Mutual Funds available ( ELSS Mutual Funds )
- HDFC TaxSaver
- ICICI Prudential Tax Plan
- DSP BlackRock Tax Saver Fund
- Birla Sun Life Tax Relief '96
- Reliance Tax Saver (ELSS) Fund
- IDFC Tax Advantage (ELSS) Fund
- SBI Magnum Tax Gain Scheme 1993
- Sundaram Tax Saver
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