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Is Top Holding Important During Evaluation of a Mutual Fund?

08 June 2022

In an era where investments in mutual funds have been growing, the question in the mind of investors has been growing at a similar pace. After all, it's the hard-earned money that is invested, and investors have all the right to remain aware of different strategies concerning mutual funds.

Top holdings are the investment securities in a portfolio with the highest market value weight and are drawn upon the basis of the complete portfolio market price they reflect. Top holdings can refer to individual investors' holdings or the greatest factor loadings in a mutual fund or portfolio.

In this blog, we seek to discuss is it essential to pay heed to top holdings while investing in Mutual Funds.

In this blog, we have comprised a list of the Best Mutual Funds for Retirement Planning along with the importance of Retirement Planning. 

Meaning of Top-Holdings

Top Holdings in a mutual fund are the top companies or the companies that make up a Super Large Shareholder Portfolio for investors, in which the fund invests. The investment objective can be based on a variety of factors, including the past performance of these stocks and current market conditions. Typically, the number of stocks in which a fund invests is determined by the type of fund. Usually, the number of stocks a fund invests in depends on the category of the fund.

Portfolio Concentration

Often, fund schemes diversify across stocks and sectors, but due to the scheme mandate or the fund manager's style, the fund manager may adopt a concentrated strategy. In this case, if the market rises significantly, the fund's net asset value (NAV) rises, as does its concentration in top holdings. If the strategy fails, a concentrated portfolio can backfire even if it is a Big Investor’s Portfolio.

Accessing Concentration

Portfolio concentration is indicated by the percentage of assets in the top ten holdings. This percentage reveals the degree of concentration and diversification of a portfolio. When combined with the total number of the Best Holding Shares, the percentage figure indicates the degree of concentration. The percentage of assets in the top ten holdings is another indicator of portfolio risk.

The higher the percentage, the more concentrated the fund is in a few companies. This also implies that the fund is vulnerable to market fluctuations due to these few holdings. An equity scheme's portfolio displays the stocks in which the fund is invested, as well as the percentage of AUM and Sector Allocation. Similarly, for a debt portfolio, ratings and holding percentages are useful to the investor.

The Number of Stocks That You Are Buying

Have you considered the number of stocks you are purchasing before investing in any fund? Hardly, right? According to research, large-cap funds hold approximately 40 shares on average, mid-cap funds approximately 50, and balanced funds approximately 50-55.

Ideal Number of Stocks in A Portfolio

According to Markowitz's Modern Portfolio Theory, diversification improves returns because it reduces the risk of relying on only one security to generate profit. According to research, a portfolio should contain around 30 stocks. However, the precise figure will be determined by a variety of factors such as total fund size, number of investors, risk tolerance, and so on.

Who Decides the Number of Securities?

A fund portfolio manager must maximize return while taking reasonable risks, so the number of stock securities is surely determined by the fund manager. The scheme objective, on the other hand, guides the fund manager.

Do Top Holdings Always Perform Well?

The short answer is no, not always. According to research, six out of ten Top Holding Stocks may underperform their sector indices in the long run. Shankar Sharma, a well-known investor, and money manager believe that 70% of Sensex stocks will go nowhere; instead, investing in small-cap stocks would help in compounding your money in 2022.

Top Holdings: Conservative or Aggressive

Another interesting fact is that roughly two-thirds of the Best Holding stocks have a beta greater than one. For new investors, beta measures the stock's movement in the market. A beta value greater than one indicates that the stock is more volatile than the market. As a result, the top holdings of MFs are volatile, which may be one of the reasons why they provide adequate returns.

Getting Access to Portfolio Disclosure

An investor can rely on a quarterly or monthly report for complete portfolio disclosure. Investors in India will no longer have to navigate through the asset management company's website to find a fund's portfolio.

The Securities and Exchange Board of India (SEBI) issued a circular on June 5, last year, instructing fund houses to send portfolio statements to investors via email once a month. According to the circular, a fund house must send the scheme portfolio statement to investors within ten days of the end of each month.

A Piece of Advice for Single Stock Investors

Never imitate Mutual Fund holdings! Professional fund managers with significant experience in the investment management industry manage mutual funds (MFs). These fund managers' job is to ensure that the fund outperforms the benchmark over time.

As a result, replicating the fund's portfolio may appear profitable. But it's not that simple. When you replicate a fund's holdings, you're attempting to guess what the fund manager is thinking. This is still an impossible task. Furthermore, MFs do not always 'pick' stocks that will outperform.

Mutual funds make strategic decisions based on the fund's benchmarks. As a result, never try to replicate a fund's portfolio because it may not always work out.

Disclaimer

The stocks mentioned in this article are not recommendations. Please conduct your own research and due diligence before investing. Investment in securities market are subject to market risks, read all the related documents carefully before investing. Please read the Risk Disclosure documents carefully before investing in Equity Shares, Derivatives, Mutual fund, and/or other instruments traded on the Stock Exchanges. As investments are subject to market risks and price fluctuation risk, there is no assurance or guarantee that the investment objectives shall be achieved. NBT do not guarantee any assured returns on any investments. Past performance of securities/instruments is not indicative of their future performance.
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