In an era where investments in mutual funds have been growing, the question in the mind of investors have been growing at a similar pace.

After all, it’s the hard earned money that is invested, and investors have all the rights to remain aware of different strategies concerning mutual funds.

In this blog, we seek to discuss is it essential to pay heed to top holdings while investing in a mutual fund?

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What are Top Holdings?

Top holdings in a mutual fund are the top companies that a particular fund is investing in. The investment objective can be based on various factors, ranging from past performance of these stocks to the present market conditions.

Usually, the number of stocks a fund invests in depends on the category of fund.



If you go to the fund page of Axis Bluechip Fund, you will see a section called ‘Top 10 Holdings’, which means these are the top 10 companies the fund has invested its AUM in.

Portfolio Concentration

Often fund schemes diversify across stocks and sectors, but sometimes the fund manager adopts a concentrated strategy, due to scheme mandate or fund manager’s style.

In this, event the market rises significantly, the net asset value (NAV) of the fund increases and the concentration in top holdings also increases.

A concentrated portfolio can backfire if the strategy goes wrong.

How to Assess Concentration?

The percentage of assets in the top 10 holdings indicate portfolio concentration. This percentage provides insights into the degree of concentration to which a portfolio is diversified.

The percent figure, when used with the total number of holdings, indicates the degree of concentration. The percentage of assets in the top 10 holdings also measure portfolio risk.

The higher is the percentage; more is the concentration of the fund in a few companies. It also means that the fund is susceptible to market fluctuations in these few holdings.

Portfolio of an equity scheme shows the stocks in which the fund is invested, the percentage of aum, and sector allocation. Similarly, for a debt portfolio, ratings, and the portion of holding is of help to the investor.

How Many Stocks Are You Buying?

Before you invest in any fund, have you noticed the number of stocks you are buying?

Not really.

Research conducted has shown that that large-cap funds, on an average, hold around 40 shares, mid-cap funds hold about 50 and the number rises to around 50-55 for balanced funds.

What is the Ideal Number of Stocks to Have in a Portfolio?

According to Markowitz’s Modern Portfolio Theory, investors get superior returns if the portfolio is diversified, as diversification reduces the risk of relying on only one security to generate profit.

Studies indicate that around 30 stocks are optimal for a portfolio. However, the exact number will depend on multiple factors such as total fund size, number of investors, risk appetite, etc.

Who Decides on the Number of Securities?

A fund portfolio manager needs to maximize return with adequate risk, and thus, it is the fund manager that decides on the number of stocks. However, the fund manager is guided by the scheme objective.

Do Top Holdings Always Perform?

Simple answer – not necessarily.

Research shows that six out of 10 shares underperform their sector indices in the long-term.

For example, India’s leading public sector lender State Bank of India (SBI) has returned a negative 4% per annum in the past five years while the S&P BSE Bank index has risen xx% during the period.

Another example is Larsen & Toubro Ltd. (L&T). Delay in economic growth and subdued order inflow has reflected negatively. L&T has generated a negative return of xx percent during the past five years.

Are Top Holdings Conservative or Aggressive?

Another interesting point to note is that among top holdings of mutual funds, around two-thirds have a beta of more than one.

For novice investors, beta measures the movement of the stock about the market.

A beta higher than one indicates that the stock would be more volatile than the market. Therefore, the top holdings of MFs are volatile and that’s also can be one of the reasons why they give adequate returns.

How to Get Access to Portfolio Disclosure?

For full portfolio disclosure, an investor can count on a quarterly or monthly report.

Investors in India will not have to navigate through the website of the asset management company to locate the portfolio of a fund.

Market regulator, Securities and Exchange Board of India (SEBI) had issued a circular on June 5 last year asking fund houses to send the portfolio statement via email to investors every month.

As per the circular, a fund house has to send the scheme portfolio statement within ten days from the close of each month to investors.

Piece of Advice for Single Stock Investors!

Never mimic mutual funds holdings!

Mutual funds (MFs) are managed by professional fund managers who have significant expertise in the investment management industry. The job of these fund managers is to ensure that the fund beats the benchmark in the long run.

Therefore, it might seem profitable to replicate the fund’s portfolio. But, this isn’t so easy.

If you replicate a fund’s holdings, you are effectively trying to guess what a fund manager is thinking. This remains an impossible task.

Also, MFs do not necessarily ‘pick’ stocks that will outperform always. Mutual Funds decide on the strategy based on the benchmarks of the particular fund. Thus, never try to replicate a fund’s portfolio as it may not necessarily go right.

Happy Investing!

Disclaimer: The views expressed in this post are that of the author and not those of Groww


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