Are you adding new mutual funds to portfolio amid rising market for better returns? Not a good idea, follow this instead They are adding new funds in a bid to boost their returns. This is a familiar story in every bull market. As fund performance kicks into higher gear and gets entrenched, investors start getting adventurous. Adding funds in the pursuit of better returns can be counter-productive in the long run. Here's what investors need to do
Raging bull markets are notoriously intoxicating. As the stock market continues its upward march, mutual fund investors are also getting tipsy. For many, it is not just the portfolio values that are swelling, but also the portfolio tail that is getting longer as investors binge on the latest chart-toppers and exotic new flavours. A bad hangover awaits the gluttonous investor, warn experts.#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;} The voracious appetite among MF investors is evident in the flows pouring into funds. Gross money invested via systematic investment plans (SIPs) surged to an all-time high of Rs.23,547 crore in August. The total number of SIP accounts reached 9.61 crore, while the folio count surpassed 20 crore. The share of equity funds in total AUM now constitutes 62% of the industry’s AUM—an all time high—showing a growing appetite for risk. Individual share in total AUM has grown from 54.9% to 63.2%.
However, investors are not simply putting more money in the existing funds in their baskets. They are adding new funds in a bid to boost their returns. This is a familiar story in every bull market. As fund performance kicks into higher gear and gets entrenched, investors start getting adventurous. They start fishing for bigger opportunities for outsized return. Recent table-toppers are the obvious targets for most. A recent study by ICICIdirect.com shows that investors have been piling on schemes that have topped the charts in the past three years.
Investors are not just chasing past return. Perhaps more alluring than established funds are new fund offers, particularly of the exotic variety. A large portion of the money has been flowing into thematic funds, which are being pushed aggressively by AMCs of late. Some of these funds invest in narrow ideas like defence, electric vehicles and tourism, while others cover broad themes like manufacturing, business cycles and special opportunities. As many as 93 new equity funds have been launched since July 2022. Of these, 56 are sectoral or thematic funds. At Rs.4.21 lakh crore, net assets under management in thematic funds have now raced ahead of all equity fund categories. Comparatively, it stood at Rs.1.54 lakh crore in July 2022, behind large-cap, flexicap and mid-cap categories. Clearly, the bulk of individual MF investors have favoured riding newer themes amid a broader market uptick. Rushabh Desai, Founder, Rupee with Rushabh Investment Services, observes, “Investors are itching to add new funds as they seek excitement or change in their current portfolios. Many also wrongly associate new funds with higher returns.”
Newer funds, chart-toppers are tempting investors
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Investors are adding more schemes in pursuit of higher returns.
Adding funds in the pursuit of better returns can be counter-productive in the long run. This is where investors’ psychology fails them, observes Vidya Bala, Head, Research, Primeinvestor.in. “Performance determines investors’ action rather than portfolio hygiene.” MF investors should guard against adding indiscriminately to their portfolios. First, it makes the portfolio unwieldy. When you have 10 or more funds in your bag, managing the portfolio will take more of your time than is necessary. Reviewing your holdings will seem like a task. Without timely checks, chronic underperformers are likely to escape scrutiny and remain a drag on the portfolio.
Second, a typical equity fund invests in at least 50-60 stocks. If you hold 8-10 different equity funds, you will be invested in around 250-300 different stocks or even more. At this point, the entire portfolio will resemble a tracker fund, mimicking the index. If you are comfortable owning the entire market, you are better off simply buying an index fund. It will save you a lot of costs and avoid any heartburn related to underperformance.
Third, with a bloated portfolio, you may not go horribly wrong, but it will take the bite out of your good choices. By spreading money thin, you are not giving enough heft to any fund to meaningfully add value. Even the best performers will not move the needle on portfolio return by much.
If your portfolio holdings have ballooned amid this market uptick, it may be time to cull the bloat. Experts maintain that going beyond 8-10 funds is a bad idea, irrespective of portfolio value. At a broader level, your focus should be on presence in the right asset classes in the right proportion. “Avoid chasing after performance and fads. Focus on asset allocation and rebalancing once a year or as per the changes in life goals,” insists Amol Joshi, Founder, PlanRupee Investment Services.
While adding new funds to your portfolio, keep asset allocation intact. Keep the portfolio lean by using the current uptick to weed out chronic underperformers. Tweak individual fund allocations to stay in step with the market. Desai suggests, “Stick with 5-6 funds at the most, maintaining a good mix of large-cap, mid-cap and small-cap funds. Add allocations to specific market cap segments when valuations turn in their favour.”
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This story originally appeared on: India Times - Author:Faqs of Insurances
