How to diversify portfolio in mutual funds? Experts discuss

On why mutual fund route is preferable Jain said, “Apart from equity, fixed income, and gold, largely, real estate is more of consumption. A large part of investors don't invest in real estate for fixed income. From a commodity aspect, I think it is better to be simple by putting money in gold for a hedging perspective. So, if you look at it from that perspective, I think it makes your life simpler and easier. Effectively asset allocations are not complicated, but it is just dividing into three-four asset classes judicially according to your needs, your risk, profile, your age, etc. and then your work is done. So if you look at from that perspective, I think this instrument is fairly there.”

Mutual Fund Corner: Why Indian investors should consider investing in developed markets

On diversification within MF portfolio, Joseph said, “One of the reasons many of us enter into mutual funds is because it gives us a nice diversified basket of stocks and securities that we like to buy, but we don't have the bandwidth to do it ourselves. Now, when we enter into mutual funds, we think that I have to further diversify by choosing a particular company or a particular scheme, or a particular category. Here, and I think we just lose the plot a little bit because when you add on too many schemes, you tend to sort of dilute the value proposition for which you are investing within the mutual funds.”

“If you take a classic example, in a large-cap, the more number of schemes you add, you are actually not diversifying, you are diluting and buying more of the same. Whereas when you go down and maybe to a selection in midcap or smallcap, there is actual diversification and value being generated by selecting or diversifying in more than one or two schemes," he said.

Midcap funds and smallcap are good for diversification, he said, “If you take a typical large-cap fund, and you look at the number of stocks they hold, and you look at the top 10 holdings, you will notice there is a familiarity. The pattern that they follow is they are very close to the benchmark and a large part of the benchmark is represented here. The names are pretty much common and weights are pretty much common. But the minute you start looking at a midcap fund, maybe even a smallcap fund, you will see different stocks, different weights, a broader representation of the market that you would like to go after and you also see the opportunity of stock selection, well-optimized in midcap and smallcap fund versus just a large-cap fund.”