The portfolio called ZOO!

Background 

Today I came across a portfolio which I named as ZOO!!

A friend of mine based out of South Gujarat town, told me to study his 15 years old portfolio managed by an uncle. He is currently doing monthly SIP of Rs 1,10,000 and current valuation of portfolio is more than Rs 1 Crore.

While I was analysing I found that total of 28 different mutual fund schemes which was a shock for me. So the average SIP per scheme is approx. Rs 4000. The portfolio has multiple flexi cap, multiple small cap, multiple mid cap funds and few sectorial funds. This is what I call a ZOO of schemes portfolio!



How not to make a ZOO?:
Actually, in markets there are 2-3 investing styles - value, growth & momentum. 

Value style: Value investing can be defined as buying stocks trading at a low valuation compared to an estimate of intrinsic value.

Growth & Momentum style: Growth investing can be defined as buying highly valued stocks on the expectation that their valuations will continue improving as the company reports encouraging results. Meanwhile, momentum investors try and chase in on trends.

If one has to invest for long term ideally the money should be diversified across two different investing styles. Means, 1 mutual fund scheme of value investing style and 1 from growth or momentum style may yield a better return than investing in a single style of investing. So if one has to invest Rs 1 Lakh, diversify schemes which are following opposite strategies.

To keep the portfolio easy to manage, 10-12 number of stocks and 2-5 mutual fund schemes (across all categories, for all goals) are expected. 

Apart from the easy management, The Modern Portofolio Theory proposed by Harry Markowitz in 1952 also supports this approach. Here we can see, if number of assets are higher in a portfolio it does not necessarily convert to higher return. Instead it adds the risk / volatility to the portfolio.

Third factor is if one has such a large number of mutual fund schemes total number stocks held is around 250-300 which is essentially almost whole of investible universe. Market has roughly around 2000 listed stocks out of which SEBI allows mutual fund managers to invest in around 350 stocks categorised by market cap. For example, 1st to 50th stocks (by market cap) are large caps, 51st to 150th stocks are mid caps and 151st to 300th stocks are small caps. Rest are defined as micro caps. So if one has mutual fund portfolio of 28 schemes, it will have around 250-300 stocks cumulatively (considering overlaps). If money is invested across market, return generated will be equivalent to market only. While our goal to get higher return than market itself (index/passive) in case of Active investing.

Money is allocated using two separate tools in the market. One is strategic allocation also known as core portfolio. This is achieved using goal based investment approach and usually long term depending on the goal for which we are investing. Here we use common categories of mutual fund schemes. 

Second tool is tactical allocation or satellite portfolio. This is generally a sectorial/thematic investments which is exit based investments means exit strategy is pre-defined either triggers by return or time. This kind of investment is not recommended to all investors because this is a riskier allocation compared to strategic allocation.

Hope you like this article and learned from it!

Happy investing!

References:

- NSE website
- Forbes Advisor
- Investopedia

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