Stock Numbers: A Key to Mutual Fund Performance

When investors choose mutual funds, they often focus on returns. However, experienced investors also consider other parameters like rolling returns and volatility. One crucial factor that many investors overlook is the number of stocks in a fund’s portfolio. Let’s explore whether the number of stocks affects a fund’s performance and if it should be a factor in selecting mutual funds.

Impact of Number of Stocks on Performance

Performance of Large Cap Funds

Number of Stocks in Portfolios:

• Less than 50 stocks: 8 schemes
• 50-75 stocks: 18 schemes
• More than 75 stocks: None

Analysis Methodology

To classify funds, we analysed the number of stocks in each scheme’s portfolio over the last six years. The median number of stocks was used to categorise them into different buckets.

Performance Comparison

• Up to 50 Stocks: Average rolling return of 13.51%
• 50-75 Stocks: Average rolling return of 13.05%

• Mid-Cap Funds: Mid-cap mutual funds with up to 50 stocks performed the best, with 3-year average rolling returns of 17.39%. Funds with 50-75 stocks had slightly lower returns, while those with 75-100 stocks performed even worse.

• Small-Cap Funds: In the small-cap category, funds with up to 50 stocks outperformed those with 50-75 stocks. The former had average rolling returns of 26.14%, compared to 22.22% for the latter.

• Flexi-Cap Funds: Similar trends were observed in flexi-cap schemes, with funds holding up to 50 stocks showing higher average rolling returns than those with more stocks.

Understanding the Trend

The trend of better performance with fewer stocks could be attributed to over-diversification. As the number of stocks increases, it becomes challenging for a majority of them to perform well, leading to diluted returns.

Should You Choose Funds with Fewer Stocks?

While the study suggests that funds with fewer stocks perform better, it should not be the sole criterion for selecting mutual funds. Investors should have a comprehensive framework for selecting funds, with the number of stocks being one of the parameters.

Exceptions to the Rule

Some funds have performed well despite holding a large number of stocks. For instance, Nippon India Small Cap, with over 190 stocks, was the best-performing small-cap scheme. HDFC Large and Mid Cap Fund, holding around 170 stocks, also delivered a strong performance.

Monitoring Your Fund’s Performance

If your fund increases the number of stocks in its portfolio, it may not be a cause for concern. Fund managers often increase holdings as the fund grows to deploy assets effectively. However, if the fund consistently underperforms its peers, it may be wise to consider switching to a better-performing fund.

Conclusion

While the number of stocks in a fund’s portfolio can impact its performance, it should not be the sole factor in selecting mutual funds. Investors should consider this along with other parameters and monitor their fund’s performance regularly. Understanding the reasons behind changes in the number of stocks can help investors make informed decisions about their investments.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.