While investing we always have to remember the old age saying “ Do not put all your eggs in one basket”. Putting all our eggs in one basket will automatically increase the risk and uncertainty of the portfolio. If supposedly, we put all the eggs are put in one basket and, if something happens to that basket, we all know we will be incurring a huge loss as all the eggs in the basket will break at once. The same goes with investing as well, time and again this has been a proven concept for creating an ultimate base for portfolio creation. When Investing it is always advisable to have an asset allocation. What do you mean by asset allocation is to invest across different asset classes? Investing in assets like Equity, Real Estate, Fixed Income/Debt, Gold and even some portions we need to have in cash i.e. Liquid assets.
Asset Allocation is the key to having a healthy portfolio. Allocating assets is not easy and has no proven formula. It may well depend on numerous factors and it cannot be the same for all. It will depend on various factors such as your risk profile, time horizon, your goals, your age, your future money requirements, your income and many more. So even before starting on the journey of investments if you are a first-time investor or even when doing your recurring investments, it is always advisable to check your asset allocation and then make a correct decision in which asset class should that money be invested.
So, while you are investing your portfolio should not look less than a grand Gujarati or Marwari thali. The thali has little of everything, so that you get the taste and flavour of everything and this will make you more satisfied and content. The same goes for your investment portfolio as well. It should look well allocated among asset classes so that you are satisfied and content and you get the flavour of all asset classes and you have the best risk-adjusted returns from the portfolio.
Once you have done your asset allocation ( there are several tools available or else you can get in touch with a Financial Advisor who will help you determine your asset allocation), so, once the asset allocation is done let’s say for example Equity 60% Debt/Fixed income 30% and Gold 10 % then your 100rs has to be divided and invested accordingly.
Now the question here is where should that 60% equity allocation go. Should I be investing in Large Caps, Mid-Caps or Small caps, or should I go for Growth Investing or Value Investing? Now, again that same 60% allocation cannot go completely Large Caps or Mid-caps or Small Caps, it has to be further diversified among different categories. You should be having more large caps and fewer mid-caps and small caps if you are a moderate risk-taker. If you are an aggressive investor you can have more mid and small caps and fewer large caps. This will ultimately depend on your risk appetite and risk tolerance.
So there are many funds available in the market which are defined and designed as per the category. SEBI in their circular in October 2017, had come out with categorization and rationalisation of mutual fund schemes. Also, they have clearly defined Large, Mid and Small caps.
a. Large Caps: 1st to 100th company in terms of full market capitalisation
b. Mid-Caps: 101st to 250th company in terms of full market capitalisation
c. Small Caps: 251st company onwards in terms of full market capitalisation
This has simplified the scheme selection and investors can take an informed decision.
Accordingly, the same has been done with Debt Mutual Funds as well. They are divided well on a duration basis, starting from Overnight Funds which cater to investment in overnight securities to Long term funds which will invest in securities with 7yrs plus durations. Also, the Hybrid Funds categories are well-categorised basis their investment in each asset class. Starting from Equity Hybrid funds to Arbitrage funds to Multi-Asset Allocation Funds.
This has made the life of investors very simple. They can choose the funds per their requirement and basis their asset allocations. But, still, there are so many categories defined by SEBI. Does one investor need to invest in all mutual fund schemes? The answer is NO. Then again the next question which will keep scratching your head is, Do I need to invest in all schemes in all categories. The answer is again NO. Then why do we need so many categories and so many schemes? The answer to this is, that you have to choose and invest in that category which suits you, your asset allocation, your risk profile, and various other factors. There are all options available for types of investors and they can invest basis their requirements and choices.
If you want to invest in Equity, Debt and Gold, you have an option to invest directly into Multi-Asset Allocation funds or you can choose to invest in one Equity Fund, one Debt Fund and one Gold Fund and create your asset allocation. The choice is yours.
Now comes the 100 bn $ question, how many ideal funds should one hold in one’s portfolio?
The simple answer to this is, that one should not hold more than 6 to 8 mutual fund schemes in their portfolio spread across Equity, Debt, Gold and now even REITs. Mutual fund schemes themselves are diversified across securities which will be held not less than 40-50 securities. Any equity mutual funds will have 40-50 stocks diversified across sectors and different companies. Buying more schemes will kill your returns due to over-diversification. Many of the mutual fund schemes will also invest in the same company so there are chances of duplication as well.
I have come across portfolios where investors are invested in more than 30-40 schemes, it's true. This means he had bought the entire market. This style of investment will only kill your returns from the portfolio.
For example, If Mr A wants to allocate his money basis all the calculations as, Equity 60, Debt 30 and Gold 10, he will have to then decide his allocation in Equity, how much will be a large, mid and small-cap. After that you only have to select one scheme, yes you read it right one scheme from the category and stay invested and keep investing all your future investments in the same scheme. No need to add more schemes just for the sake of you reading it some were in the newspaper or news channel or some friends have invested in that fund, so you also want to invest in that fund.
One Scheme from one category is good enough.
Asset allocation is important-do asset allocation before deciding on the number of funds.
Do not invest 100% into one asset class, diversify between equity, debt, and gold.
An ideal number of funds to hold is 6-8.
Beyond 6 funds, returns could be average due to the overlap of stocks held in the portfolio.
Among these 6 funds, decide on which type of funds basis your asset allocation.
The bottom line to this is to have as few funds as possible in your portfolio. Don’t create a basket that even you find difficult to track and monitor. Keep monitoring your portfolio at least once or twice a year and rebalance it if necessary.
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