Too many schemes will spoil the returns

Even for a huge corpus of Rs 4-5 cr, financial planners recommend only 20 MF schemes

In the past year, the top five mutual fund (MF) performers in the equity large-cap segment are IDBI India Top 100, LIC Nomura MF Growth, Kotak 50 Regular, JP Morgan India Equity and UTI Top 100. Their returns are between 21 and 25 per cent. In comparison, the Sensex's was 5.7 per cent.

The question is if you should invest in all these five funds. Let's look at the top five holdings of these schemes. All of these hold HDFC Bank. Four hold ICICI Bank and Larsen & Toubro. Three hold Axis Bank. Two hold Infosys, HDFC and Maruti Suzuki. The only fund which holds two different stocks, Bosch and Bharat Forge, is IDBI Top 100, and LIC Nomura has Eicher Motors.

In other words, the top five funds' top five holdings are mostly common, stocks held in different proportions. The returns, therefore, are unlikely to be remarkably different.

Experts believe owning too many MFs is a classic sign that there is no comprehensive approach to your portfolio strategy. Simply because the more overlap you have, the closer you'll get to index hugging and this is especially true for large-cap schemes which have index stocks.

How many are too many?

Buying too many schemes has been the bane of many investors. Many distributors agree that in 2007-2008, when the markets were hitting new peaks every month, a number of investors accumulated MF schemes very aggressively. Many were stuck with 50-70 schemes or even more.

"Many distributors aggressively sold schemes to make a quick buck. Consequently, investors really did not have a proper portfolio allocation but had all kinds of schemes," said a chief executive (CEO) of a mid-sized fund.

Financial planner Suresh Sadagopan says that even if a person has a very large investible amount, say Rs 4-5 crore, it makes little sense to invest in more than 15-20 schemes. "That, too, these schemes would include all kinds of funds - thematic, international, large-cap, small-cap and so on," says Sadagopan. Usually for smaller portfolios of Rs 1-5 lakh, financial planners advise three to four schemes, depending on age and risk profile.

More for diversification

The MF sector offers a large variety of schemes. In the equity segment, there are large-cap, mid-cap, small-cap, balanced, closed-end, exchange-traded funds and so on. Depending on risk profile, you have to choose the right funds. "If the tenure is long, it makes sense to be more aggressive by including mid-cap or thematic schemes. But, if the tenure is, say, two years, one would rather go with debt funds," adds Sadagopan. Depending on different goals, you should match the schemes.

According to leading CEOs of fund houses, things are changing. The average tenure of investment is improving. So are investor attitudes. These have happened after the market crash of 2008, when investors realised they had too many schemes which was a drain in terms of cost but the returns were not there. Schemes were pruned, systematic investment plans were stopped and there was mayhem all over. After August 2009, when entry load was banned, things turned worse as many fund distributors started exiting the market and investors were not serviced.

Things have stabilised in the past couple of years. With the Sensex rising from 21,000 to almost 30,000 points, investors are returning to the market and leading CEOs are saying they see a change in the former's behaviour, in terms of average tenure of investment and willingness to stay put during volatile times. And, this time, most are being advised not to make the same mistake of accumulating schemes.

"When the going is good, MF investors dabble in all kinds of schemes. Some believe new fund offerings are great, others buy the flavour of the season themes and then, there are other varieties like closed-end schemes, international funds and so on," says a CEO.

Investing strategy

For Jayant Pai, head of marketing, PPFAS MF, even four or five can be optimal, provided you do not have similar type of schemes. He owns only two equity and two debt schemes. In his equity portfolio, one is a broad-based scheme that provides him domestic and international exposure. The other is a scheme linked to the BSE Sensitive Index, or Sensex. Similarly, he owns only two debt schemes.

In the case of debt, he prefers schemes that are low cost. "Since there isn't much difference between the best and worst performing funds in these schemes, it makes much more sense to look at costs, which can erode the returns if too high," adds Pai.

So, ideally, look for a good scheme but the cost or expense should be bottom-quartile.