According to the Value Research Data, out of 137 only 18 have diversified equity funds and these 18 have outperformed the BSE Sensex for the year ending October 3. Many of these are sectoral or theme-based funds and have crushed the top indices because their particular sector or theme has done healthy over this period. This leaves only about 10 diversified funds that have better the Sensex greater than the one year period, an extremely bad number by any standards
The one-year time frame is essential because in this period there was a sharp modification and an equally spectacular recovery, and most funds, it appears from the results, were caught sleeping. To be more reasonable, the diversified category also includes many sector and speciality funds where the Sensex is not the right point of reference. However, below market return must upset investors.
The clear explanation for this below average performance is that these funds hold extreme too many stocks. The fact is that the principle of mutual fund investing is diversification. An individual investor is habitually unable to build a portfolio that eliminates unsystematic risk, the possibility that some stocks may not perform up to hope. He, thus, pools his savings with those of others through mutual funds to acquire a well-diversified portfolio.
The difficulty is that mutual funds often go overboard and invest in portfolio that may includes lot more stocks than what is required to achieve significant risk reduction. Even though, there is no agreement, studies suggest that a portfolio of about 20 stocks is good enough to achieve sufficient diversification. Subsequently, the decline in risk is not in keeping with the addition of more stocks. Any addition of more shares from these levels only averages out performance without proportionate reduction in risk.
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