With the stock market scaling new heights, advisors say that they are recommending investors to invest their money in diversified funds. With valuations way above historical the average, investing in diversified funds seem to limit the downside risk and offer high returns in the long term, they say.
On the other hand, many fund houses introduced focussed funds arguing that the focussed strategy has potential to generate better returns compared to diversified portfolio due to their concentrated structure. In focussed funds, fund managers construct portfolio with 20-30 high conviction stocks. However, these funds are riskier as the fall in markets can have an adverse impact on NAV.
We spoke to a few advisors to understand why they prefer recommending diversified funds to focussed funds despite the market rally.
Nikhil Kothari of Etica Wealth Management believes that focussed funds are meant for aggressive investors. “Focussed funds have given spectacular returns in the last three years as these funds invest only in select companies. Focussed funds work well in rising market. However, advisors should recommend investors to go for diversified funds as these funds are in a better position to tackle volatility,” says Nikhil Kothari of Etica Wealth Management.
Kothari is sceptical about the long-term performance of focussed funds. A concentrated portfolio can get a blow if fund manager’s calls go wrong, he adds.
Seconding Nikhil’s view, Chennai-based IFA, AK Narayan of AK Narayan Associates said, “Focussed funds are good for savvy investors. In my view, retail investors should go with diversified funds. Over the years, diversified funds have performed well across market cycles.” Instead, Narayan advisors advisors to recommend mid and small cap funds to investors who have an appetite for high-risk.
Suresh Sadagopan of Ladder7 Financial Advisories too prefers diversified funds. According to him, advisors should first look at the investment style of the fund manager before recommending focussed funds to their clients. “Advisors should look at funds which follow buy-and-hold strategy having low churning,” says Suresh.
Arguing why focussed funds can deliver better returns compared to diversified portfolio, Gautam Sinha Roy, Equity Fund Manager, Motilal Oswal MF (who also runs a focussed fund) says, “Diversified portfolios aim to mitigate risk by increasing the number of stocks. Studies have shown, though, incremental risk reduction is immaterial beyond 20-22 stocks. Hence, there is no point in holding too many stocks if the purpose is risk reduction. In addition, an investor should know that every fund manager has a bandwidth. It is difficult to track too many stocks.”
