How many mutual funds should I hold?

——————————————————————————————————————————– I came across the question on an online forum, and wanted to answer this …..

How many mutual funds should I hold?

Let me try to answer your question from several perspectives.

Answer from perspective 1: A mutual fund is a collection of direct stock investments with an overall theme and structure. The theme usually is

  • Large Cap/ Mid/ Small equity, or
  • a sector equity, or
  • a debt or bond fund, or
  • a mix of above.

The structure will be a diversified number of stocks/ bonds with an upper limit for any single investment. It can also limit sector concentration, etc. There are also norms of Risk and Churn which are to be followed. Having noted this, I would argue that if we understand the perspective of the investor, just one MF would be sufficient. This choice would incorporate the risk profile of the person –

  • Conservative (debt, bond, ETF or safe Large Cap equity MF)
  • Aggressive (Mid Cap, Small Cap or sector fund) and
  • Balanced (diversified equity plus debt).

There may also be a mutual fund house performance risk, so at best a second fund may be added from another MF house.

Answer from perspective 2:

For equity investments, None.

I am personally of the view that once a new investor has experienced equity MF investing for a few years (or even earlier), he is mature enough to both –

  1. do some of his own research and
  2. realize some of the negatives of MFs.

And he may be ready for Direct Equity investments on his own. Let me elaborate. MFs are good instruments for the beginner investor. But there are a couple of negatives of MFs

  1. Annual management expense are fixed costs of up to 2.5% of portfolio.
  2. Variable performance of MFs. Many have underperformed the benchmarks over extended periods of time.
  3. No success incentives. There is no element of success profit share with investor, so there is no incentive to outperform the indices, except a higher position on the rating charts.
  4. Mis-selling of MFs by intermediaries can cause high MF churn, not allowing investors to wait for gains.

In this scenario the investor may realize that investing directly in equity with some guidance is the lowest cost and maximum gain scenario, for long-term investment gains. This is what we do at JainMatrix Investments.

  • The investor can use his own demat and trading account for share purchases
  • The investment service recommends investments into direct equity and monitors them to ensure performance
  • After the fixed costs of the Investment service, and the demat and share purchase costs, the investor gets to keep his entire portfolio profits, effectively maximizing gains
  • Critical here is the quality of the investment service, which they should ensure

JainMatrix Investments has a great track record, check for yourself. LINK

Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Either JM or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

Advertisements