According to data shared by the Association of Mutual Funds in India, the mutual fund industry has reportedly added nearly 81 lakh investor accounts in 2020-21 alone. This takes the total tally of mutual fund investors to 9.78 crore in the country. Experts are optimistic about a healthy growth trajectory considering this rapid rise in the number of mutual fund investors.
With this growth spurt experienced by the mutual fund industry, an important question that arises is whether investor knowledge is growing at a similar pace? Before one invests in any mutual fund, do they notice the number of stocks being purchased? Research shows that large-cap funds generally hold around 40 shares, mid-cap funds approximately 50 and the number increases to 50-55 when it comes to balanced funds.
Within the shares held, there is special importance given to top holdings. So, what are these and why is it noted by investors?
Here, we will discuss the concept of top holdings in a mutual fund investment and its importance while evaluating a mutual fund.
What are the top holdings of mutual funds?
Top holdings are the securities that have the highest market value weight in a mutual fund portfolio. These are determined using the relative market value that they represent in a portfolio.
Top holdings are used to gain an insight into a portfolio’s investment style and the kind of securities that it invests in.
Top holdings are usually ranked as per their total market value or as a percentage of the mutual fund’s total assets. Investors can identify their top holdings as those with the highest investment value.
Most mutual funds report their top ten holdings on their website or other marketing information of the fund. Top holdings can often be spotted in information containing the fund’s asset class, sub-asset class, or sector breakup. These may include all kinds of securities from the investment universe, including different stocks and bonds.
How to determine asset concentration?
The percentage of assets in the top 10 holdings reflects portfolio concentration. It gives insights into the level diversification adopted by a portfolio. The concentration percent can be used by investors to measure portfolio risk by looking at the percentage of assets in the top 10 holdings.
The higher the percentage, the more the concentration of the fund in fewer companies. This shows that the fund could be susceptible to market fluctuations affecting these few holdings.
For example, the portfolio of an equity scheme will show the stocks in which the fund is invested, the percentage of AUM, and sector allocation.
Is there an ideal number of stocks that a portfolio should have?
Certain investment theories suggest that investors may achieve superior returns if the portfolio is diversified. This is because diversification can help in reducing the risk of relying on only one stock for generating profits.
Studies also indicate that approximately 30 stocks may be ideal to have in a portfolio for mutual funds. However, the exact number of stocks depends on multiple factors such as total fund size, investor base, risk appetite, etc.
Do top holdings indicate conservative or aggressive investment approach?
Among the top holdings of mutual funds, the majority have a beta of over one.
For new mutual fund investors, beta measures the movement of the stock against the market. A higher beta, that is more than one, indicates that the stock is more volatile than the market.
There is no guarantee that the top holdings always outperform the market. In most cases, the majority of the top holdings underperform respective sector indices in the long run. Therefore, top holdings may not be the right indicator of conservative or aggressive approach adopted by a fund.
How can investors access portfolio disclosure?
To access full portfolio disclosure, an investor must go through the quarterly or monthly report of the fund. Investors in India will no longer have to search for portfolio disclosures on the fund website as the market regulator, Securities and Exchange Board of India (SEBI) has issued circular asking fund houses to provide monthly portfolio statements via email to investors.
A fund house is now mandated to send the scheme portfolio statement within ten days of the monthly close to investors.
Mutual funds are managed by professional fund managers with sufficient investment expertise with the objective to beat the benchmark in the long run. Therefore, single stock investors might assume that it is profitable to replicate the fund’s portfolio. However, they should try and avoid mimicking mutual funds holdings to avoid additional portfolio risk.
While choosing a mutual fund, one should look at the top holding factor in combination with other factors such as AUM, historical fund performance, etc. This will allow investors to make a wiser choice.
- How do I choose the best mutual fund?
To choose the right mutual fund for investment, an investor should check personal risk appetite and expected returns against the mutual fund objectives. It is equally important to consider the investment time horizon before selecting a mutual fund. Mutual funds that have historically showcased consistently positive results are usually preferred by investors.
- Which mutual fund is best for beginners?
For new investors, it is ideal to choose low risk mutual funds like debt or fixed income funds. These require less monitoring and may offer stable income.
- How to invest in a mutual fund?
The best way to invest in a mutual fund is through the Finity app. This can be easily downloaded on a smartphone to explore a wide range of mutual fund options across various time horizons, risk categories and asset preferences.
- What is the best mutual fund strategy?
Every mutual fund investor can adopt a customised strategy to invest in mutual funds. There is no single best strategy since each investor may have different risk and return appetites along with asset class preferences.
- Is it good to invest in SIP?
SIP or systematic investment plan is an ideal option to invest in mutual funds since it allows sufficient liquidity in the hands of the investor while inculcating investment and savings discipline.