I am new to mutual fund investing and I have been investing in Axis Bluechip and Axis Midcap fund since October 2020. Is it necessary to have four-five funds in a portfolio or are these funds enough?
- Omkar Shinde
Well, there is no hard-and-fast rule about the number of funds. Generally, we do recommend investors to diversify across funds, but really don't go overboard and we believe that four to five funds should be adequate in a portfolio.
For a small investor, who is contributing about Rs 5,000 a month, maybe just a couple of funds are good enough. But someone who is investing a much larger sum every month can look at building a little more nuanced portfolio and add a few more funds. But having said that, what I note about his investments is that both of his funds belong to the Axis mutual fund house. One is a large-cap fund and the other one is a mid-cap fund and hence, their investment universe is fairly different and likely there is not much overlap in the underlying portfolios of these funds. Despite these facts, it is still desirable for an investor to diversify across a few fund houses and hence, at an AMC level, he should consider diversifying a little bit.
That is because despite having very different investment mandates, there are certain commonalities that run within the funds of a fund house. They have a common equity research team due to which they would have commonalities in their equity market outlook, their outlook on different sectors or their stock selection process or even their investment style.
For instance, if you talk about Axis, their equity funds generally tend to prefer running high conviction portfolios with a very limited number of stock holdings. So they tend to be more concentrated than many other funds in their categories. Also, they have a very sharp focus on the quality of stocks that they own and they don't mind paying a premium for that and that's why you would notice that a lot of their funds have portfolios which are fairly richly valued on the P/E ratio metric. Thus their funds happen to have the highest P/E ratios in their respective categories.
So the broad point that I am trying to make is that there are certain commonalities that run across different funds of the same fund house. In case their investment style goes out of favour, which very likely can happen at certain points in time, then if you are only invested with one fund house, the impact would be felt across all your investments. So it is always desirable to spread your investments across a few fund houses. So from that perspective, it is desirable that he adds one or two funds to diversify if the magnitude of investment is higher as mentioned.
