Nippon India Small Cap Fund has a total of 151 stocks in its portfolio, as on May 31, 2022. HDFC Large and Mid Cap Fund has 136 stocks in its portfolio.
Multi Cap Fund has 121 stocks. Compared to a ballpark figure of 50-70 stocks, these figures look too big.
Skeptics believe a very large portfolio shows lack of conviction of the fund manager. A concentrated portfolio, on the other hand, shows high confidence. Is it true? What is prudent diversification? What is over-diversification?
Nippon India Small Cap Fund is the biggest small cap fund in the industry with assets worth Rs 18,675 crore. According to financial advisors, 151 stocks is a big number but they say it’s understandable why the fund has so many stocks.
“Small cap segment is a very open-ended and vast universe with the majority of stocks with liquidity issues. In the last two years, many small cap companies have seen their valuations swell also. However, the small cap segment is the first one to take the beating also. Hence, when you have to deploy 19,000 crore in such small companies, you don’t want to go overboard on any one or two or 10 stocks, like you can do in mid or large cap segments. Hence, the number of stocks keeps going up,” says P Chokkalingam, Director, Prakala Wealth Management, based in Chennai.
However, it is not always that bigger AUM means higher number of stocks.
Small Cap Fund bets on only 50 stocks with an AUM of around Rs 11,000 crore. Mutual fund advisors say that this totally depends on how the fund is managed and the strategy of the fund manager. “You can take bold calls and be okay with short term downside like many value fund managers do. In that case you bet on a few stocks which you have conviction in. However, to do that in a small cap segment is risky and needs very high conviction from the fund manager,” says P Chokkalingam.
Another fund with a large number of stocks is HDFC Large and Mid Cap Fund. The scheme invests in a category with relatively better liquidity. It has 136 stocks in the portfolio with an AUM of Rs 5,926 crore. The large and mid cap segment has fairly high liquidity and a smaller universe compared to small cap, hence the high number of stocks seems illogical. However, there’s another catch. In January, this year, HDFC Mutual fund had merged HDFC Long Term Advantage Fund, HDFC EOF – II – 1126D May 2017 (1) and HDFC EOF – II – 1100D June 2017 (1) into HDFC Large and Mid Cap Fund. Mutual fund advisors say that the portfolio has become bigger due to that.
“The market hasn’t been very easy after January. Hence the churning of portfolio would be a difficult task for fund managers. The merger of three schemes in one has led to a lot of stocks getting added to the existing portfolio. I am assuming the number will come down eventually,” says Harshad Chetanwala, Founder, My Wealth Growth, a wealth management firm, based in Mumbai.
Also, schemes like HDFC Multi Cap Fund,
Multicap Fund, ITI Multi Cap Fund, Nippon India Multi Cap Fund, also have a high number of stocks in their portfolios. The number ranges from 90–121. Financial planners believe that the reason for multicap funds having a very diversified portfolio is just to reduce the risk in the small cap portion. Sebi has mandated multi cap funds to have a minimum 25% allocation to small cap stocks.
“Multicap funds have a 25% allocation to small cap stocks. 25% is a lot of exposure, considering these schemes were run like flexi caps earlier. This increases the risk manifolds. Especially, in times like now, when small caps are the most hit and the volatility is not going anywhere for some time now. Fund managers want to diversify the bets as much as they can, specifically in the small cap segment. Hence the numbers of stocks are going up,” says Harshad Chetanwala.
In the end, these financial advisors say that even though a higher number of stocks will impact the possible returns in the scheme if the market goes up but the calls are taken as per market conditions. They suggest that investors don’t need to worry about the number of stocks in their schemes.
“If you look at the concentration of the top 10 stocks in all the schemes with these big portfolios, it is usually 20-30%, which is a fairly decent concentration. In the small cap segment, you can’t possibly over diversify because it is a very vast segment. Also, every fund is run on a strategy, if you want a concentrated portfolio, then this might be a problem for you. But most retail investors want diversification and I believe until the performance falters, one should not worry,” says Harshad Chetanwala.