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Subbu’s Solutions: Selection of Midcap Funds
Posted On Sunday, Jan 01, 1950
(4) Dear Sir, I am a 68 years old and I invest in Mutual Funds through the SIP route. I wish to have your views on my selection of schemes, though the bias is towards midcap funds. I plan to distribute the wealth created among my three children who are all well placed in jobs.
I shall much obliged and thankful to you for your views. – SG Chellapa
Dear Mr. Chellapa,
Firstly, monitoring such a vast portfolio as yours is a cumbersome task. So may be you can trim the number of funds, and then you would be able to monitor them more effectively. I also noticed that there are a few mid cap funds in your portfolio, which could result in duplication and expose your portfolio to higher concentration in mid caps which would be risky. If you were to add up all the underlying stocks in each of the mid cap portfolios you may end up with a significant exposure to a few stocks, again making it risky.
Take a look at the example mentioned below. Now assume you have 3 mid cap funds A, B and C. The exposure to Stock H on a cumulative basis is 25% of your mid cap portfolio. Now say for instance, Stock H goes bust. Now 25% of your portfolio is affected.
Mid Cap Fund | Mid Cap Fund | Mid Cap Fund | Total | |||||
Amount invested | Percentage of Portfolio | Amount invested | Percentage of Portfolio | Amount invested | Percentage of Portfolio | Amount invested | Percentage of Portfolio | |
Stock A | 10,000 | 12% | 0 | 0% | 3,000 | 4% | 13,000 | 6% |
Stock B | 2,000 | 2% | 2,000 | 3% | 2,000 | 3% | 6,000 | 3% |
Stock C | 20,000 | 24% | 5,000 | 8% | 18,000 | 26% | 43,000 | 20% |
Stock D | 15,000 | 18% | 2,000 | 3% | 19,000 | 27% | 36,000 | 17% |
Stock E | 2,000 | 2% | 8,000 | 12% | 4,000 | 6% | 14,000 | 6% |
Stock F | 1,000 | 1% | 9,000 | 14% | 2,000 | 3% | 12,000 | 6% |
Stock G | 10,000 | 12% | 10,000 | 15% | 3,000 | 4% | 23,000 | 11% |
Stock H | 22,000 | 27% | 18,000 | 27% | 15,000 | 21% | 55,000 | 25% |
Stock I | - | 0% | 12,000 | 18% | 4,000 | 6% | 16,000 | 7% |
82,000 | 100% | 60,000 | 100% | 70,000 | 100% | 218,000 | 100% | |
Additionally, I would suggest investment in broad based schemes rather than investing in sector specific funds. Prune the number of funds in your portfolio to a few diversified schemes. If you want exposure to a variety of funds opt for a Fund of Funds scheme.
Subbu's Solution is authored by I.V.Subramaniam. I.V.Subramaniam is a director of Quantum Asset Management Company Private Limited and Chief Executive Officer & Chief Investment Officer of Quantum Advisors Private Limited. The responses expressed here are the personal view of the author.The responses expressed here are strictly for information and explanation purpose only. The responses are meant for general reading purpose and not to be considered as an investment advice / recommendation. This information is not intended to be an offer or solicitation for the purchase or sale of any financial product or instrument. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investments. The Sponsor, The Investment Manager, The Trustee, their respective directors, employees, affiliates or representatives shall not be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way from the information contained in the responses. Please visit – https://www.quantumamc.com/disclaimer to read scheme specific risk factors.
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