Ask Morningstar: Diversification also applies to fund managers and AMCs

Though these are a good mix of funds from different categories, there are few factors that you need to consider before making an investment decision.
By Nehal Meshram |  17-06-22 | 
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About the Author
Nehal Meshram, Senior Research Analyst at Morningstar. She would like to hear from you, but cannot give financial advice.

I'm 29 years old and a high/aggressive risk taker. My SIPs are in Quant Tax Plan (Rs 4,500) and Mirae Tax Saver (Rs 2,000). While both are ELSS, I'm planning to invest another Rs 20,000 per month over the next 10-15 years in following funds: Quant Active (Rs 6,000), Parag Parikh Flexi Cap (Rs 4,000), Canara Robeco Small Cap (Rs 2,000), Quant Absolute Fund (Rs 4,000), Canara Robeco Bluechip Equity (Rs 4,000).

The funds you have picked are all well-managed strategies with different mandates. They have a good track record in their respective categories.

Quant Active Fund

Multi-cap fund that invests at least 65% in equities across market caps. Over the last two years the portfolio is biased towards large-cap stocks. The fund is managed by Sanjeev Sharma and has displayed excellent returns on all time frames. Please read What makes Quant Mutual Fund such a hit?

Parag Parikh Flexi Cap

Flexi-cap fund that invests dynamically across large-, mid- and small-cap stocks. The fund had consistently maintained higher allocation to large-cap stocks. The fund is managed by Rajeev Thakker who is an able and experienced manager. He follows a value style and invests in quality stocks that are available at reasonable or attractive valuations.

In addition to domestic companies, the fund has the mandate to invest in overseas stocks. Is that why you selected this fund? Do read Looking for global diversification? Here's how you can still invest and What Indian investors need to know about global investing right now

Canara Robeco Small Cap

Small-cap fund where a minimum 65% is invested into small-cap stocks. Since its inception in 2019, the fund has delivered excellent returns in a short period of time. Portfolio manager Shridatta Bhandwaldar maintains a quality portfolio by investing in companies that have strong balance sheets and looks for margin of safety in terms of valuations. Such funds can be quite volatile over the short term. 

Quant Absolute

From the Aggressive Allocation category, the allocation to equities is maintained between 65%-80% and balance in fixed income/cash. Over the last two years, the fund has maintained a larger equity allocation (almost 80%) to large-cap stocks. The fund is managed by Sanjeev Sharma.

Canara Robeco Bluechip Equity

A large-cap fund, it is benchmark aware and the stocks in the portfolio are similar to the S&P BSE 100 TRI benchmark. The weight of these equities, however, is determined by portfolio manager Shridatta Bhandwaldar, and may deviate from the benchmark weight. The fund has outperformed the benchmark and most of its peers across the time frames.

Too much of anything is bad

Though these are a good mix of funds from different categories, there are few factors that you need to consider before making an investment decision.

You have chosen most of the funds from a couple of Asset Management Companies (AMCs). Even if you are a mutual fund investor, it is better to have a diversified portfolio. Diversification does not mean investing in a variety of strategies with different mandates, but one should also look at different AMCs.

We think that funds from the same AMCs have a similar thought process, fund management styles and investment philosophy. As a result, funds may perform well or poorly. Also, any issues at the AMC level may resonate across the portfolio, affecting the performance of all the funds. If you diversify your investments among different strategies within diverse AMCs, you will be in a far better position to take advantage of the diverse investment processes and also reduce concentration risk.

The three funds that you have shortlisted from Quant AMC are managed by the same portfolio manager. Ditto with the two Canara Robeco funds. It is natural for investors to lean towards names that they already know. And it is possible that the portfolio managers are capable of delivering superior returns. However, one should not go overboard while selecting managers as their investment style may not work in all market cycles. Also, what if the fund manager decides to leave the firm? This will undoubtedly be a red flag because the new manager will need time to adapt to the approach and may not necessarily be as competent as the previous manager.

Consider all these factors before constructing a mutual fund portfolio that will help you diversify risk and increase your return potential.

Here you can find our analyst’s views on funds.


Articles authored by Nehal Meshram

Registered readers can post their queries by accessing the Ask Morningstar tab. Our team will answer SELECT queries relating to mutual funds, portfolio planning and personal finance. While we provide broad guidelines, we suggest you consult a financial adviser before making investment decisions.

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