Ask Morningstar: Many funds, but not diversified

Feb 21, 2023

I am 21-years old with moderately high-risk appetite. What do you think of my portfolio? My investments: Nippon Small Cap (300), HDFC Focused 30 (300), ICICI Value Discovery (100), ICICI Focused Equity Fund (100), HDFC Business Cycle (100), Navi Large & Midcap (80), Navi Flexi Cap (60), Navi Nifty 50 Index (50), Navi Nifty Midcap 150 (40).

Good to see that you have started investing at a young age.

You seem to have considered investing in across different categories.

Nippon Small Cap invests minimum 65% in small cap stocks. It is managed by Samir Rachh. He focuses on identifying good growth businesses with reasonable size, quality management and rational valuation. The investment approach adopts prudent risk management measures like margin of safety and diversification across sectors and stocks with a view to generate relatively better risk adjusted performance over a period of time. Small caps have extreme growth potential, however, the investors need to exercise patience in turbulent times and hold on to investment for a longer term.

HDFC Focused 30 follows a concentrated investment approach with portfolio comprising up to 30 stocks. The fund recently witnessed a change in portfolio and is managed by Roshi Jain since 2022. Roshi is an experienced manager and select stocks with its growth at reasonable valuation approach. The fund has a large-cap bias and has been able to deliver above average returns over the long run.

ICICI Focused Equity invests in a concentrated portfolio of up to 30 stocks and has the flexibility to follow multi-cap approach to invest across market caps but holds a large-cap bias. This fund is managed by and able portfolio manager Sankaran Naren. He focuses on investing in companies that have strong financials, quality management, high profitability, and sustained competitive advantages. The fund is sector agnostic and maintains an overweight stance on select high conviction themes/sectors that are expected to outperform in the ongoing economic cycle.

ICICI Value Discovery has a Morningstar Analyst Rating of Gold for its direct share class. The fund is being led by CIO Sankaran Naren since 2021 following Mrinal Singh’s exit. Naren is one of the most seasoned managers in the Indian mutual fund industry. The fund is run with a value-driven investment approach and Naren has a distinct skill of uncovering value opportunities. However, the value tilt requires significant patience as value stocks can underperform growth stocks for lengthy periods.

HDFC Business Cycle is a newly launched thematic fund. It focuses on companies that are at the midst of favourable business cycle. While business cycle funds may have the potential for high returns, they also carry a high level of risk.

Navi Mutual Fund is a new entrant in the mutual fund industry. We suggest that investors not invest in new funds as they don’t have a credible track record. Also, as these are all small funds even if a few large investors exit the funds it would be severely impacted. However, this is not the case with larger fund houses, they enjoy a lot of advantages. The bigger asset management companies (AMCs) can effort to spend on additional resources and strengthen the research as they generate huge revenue. Moreover, investors benefit from economies of scale resulting from large size are passed on to investors in terms of lower Total Expense Ratio.

Few observations on diversification.

Do you really need two focused funds? Diversification involves looking at various asset classes, various AMCs, and various strategies with various mandates.

You selected most of the funds from a few AMCs. ICICI Prudential (2), HDFC (2) and Navi (4). Having a diverse portfolio from an AMC perspective is preferable. 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 two funds that you have shortlisted from ICICI Prudential AMC are managed by the same portfolio managers. It’s natural for investors to lean towards names that they already know and I’m sure that the portfolio manager is 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.


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.

Add a Comment
Please login or register to post a comment.
© Copyright 2024 Morningstar, Inc. All rights reserved.
Terms of Use    Privacy Policy
© Copyright 2024 Morningstar, Inc. All rights reserved. Please read our Terms of Use above. This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.
As of December 1st, 2023, the ESG-related information, methodologies, tools, ratings, data and opinions contained or reflected herein are not directed to or intended for use or distribution to India-based clients or users and their distribution to Indian resident individuals or entities is not permitted, and Morningstar/Sustainalytics accepts no responsibility or liability whatsoever for the actions of third parties in this respect.
Company: Morningstar India Private Limited; Regd. Office: 9th floor, Platinum Technopark, Plot No. 17/18, Sector 30A, Vashi, Navi Mumbai – 400705, Maharashtra, India; CIN: U72300MH2004PTC245103; Telephone No.: +91-22-61217100; Fax No.: +91-22-61217200; Contact: Morningstar India Help Desk (e-mail: in case of queries or grievances.