Stop Over Diversifying The Perfect 5 Mutual Fund Portfolio Strategy

TITLE: Stop over-diversifying! The Perfect 5-Mutual Fund Portfolio Strategy CHANNEL: Sana Securities - Investing Simplified DATE: 2025-11-26 ---TRANSCRIPT--- So, over the last few days, I’ve got a lot of questions about mutual funds. You know, people have asked me, “How many mutual funds should you have? What’s an ideal portfolio size? How long is long-term?” All sorts of questions. So, particularly on Twitter and in my consultations that I keep doing, I’ve seen portfolios with a very, very diversified portfolio of mutual funds. So I thought I’ll just take some time to do a video dedicated to mutual funds. Just to give you a disclosure, I am a SEBI registered financial adviser. I do invest in mutual funds myself. In fact, almost 60% of my portfolio today is in mutual funds but a lot of that is on fixed income side which is arbitrage and gold. I don’t hold any uh debt oriented mutual funds now because I see no point in holding these after the changes in the tax laws. Be that as it may, I thought I’ll cover a few important questions that you know I marked based on, you know, the portfolios that I looked at and based on what people asked me. So, you know, how many mutual funds should you hold? Should you have 5 7 8 10 12 funds? I’m going to answer that. How to structure your mutual fund portfolio? And this is important because I see a lot of people are going either too conservative or a little too aggressive. Now, I don’t know the people who are asking me these questions. is do they also invest in uh equities other than mutual funds? So the answer could vary but what I’m going to do is I’m going to try and give you uh a plan so that you can deise your own mutual fund portfolio based on whether you also invest in stocks or not. So stick around between these uh uh segments of this video. There would be my favorite funds that I’m myself holding that I really like. And I’ll also tell you how you make a portfolio of your own, giving you a lot of choices. By the end of this video, sit with a pen and paper. You’ll be able to put down for yourself which mutual funds should you be holding based on your time horizon, based on what your risk profile is. Are you aggressive or are you conservative? And I think this has a lot to do with u you know how aggressive or conservative you are has a lot to do with how you structure your mutual fund portfolio like should you have a stable portfolio or should you have a dynamic portfolio which keeps changing from time to time and this is essentially what I’m talking about is core portfolio versus a satellite portfolio. core portfolio is one which does not change for you know 8 to 10 years for a long term and a satellite portfolio where you take thematic calls or you take uh time specific calls typically I do have calls for 18 to 36 months based on the sectors which I think should do well I believe 70% of core portfolio 30% in u satellite portfolio works we’ll come to that as we go on and the fourth thing that I’ll answer is I’m actually going to take a question which I received from Deepak on Twitter. I said I’ll mention him so I’m mentioning him. I’m taking this question because I really really liked what he asked and I agree with what he’s saying now. He said if you’re investing for a really long term that’s 10 plus years and you know that over that duration mid and small caps outperform large caps then why not invest only in small and midcaps over a longer term. Why should you even look at investing in in large cap stocks? So if you have a look at this table, this is the 10-year performance of various segments of the market. So large caps have grown about 13.75% CAGGR. Midcap index has grown about 18% CAGGR. And if you look at Nifty small cap index, that’s grown about 15.4% CAGGR. Eight out of 10 years, you’ll see small caps actually underperform midcaps. And midcaps are actually the fastest growing segment of the market for most of the years. If you go back to 2024, last year towards the second half, I think small caps way outperforming uh midcaps. But in general, the year in which you sell, eight out of 10 times chances are that small caps would be underperforming midcaps. So I’m actually big on midcaps. I prefer having a portfolio heavy towards midcap stocks if you’re investing for a daily long-term. So let’s take these questions one by one. So, first, how many mutual funds should you own? And I think I’ve answered this many, many times, and I always say if you’re going to go wrong with five mutual funds, you’re going wrong with 50. Cuz you know, five mutual funds is enough to give you the kind of diversifications you need. No matter what your goal is, whether you’re conservative, aggressive, hybrid, whatever, five mutual funds is tops for me. And in this five, I’m also counting in the thematic funds that I hold from time to time. you know I buy two to three funds which you know I would hold for 18 to 36 months based on you know a top- down approach of the market where I see you know undervaluation in a given sector so essentially for long-term holding I’m actually counting just holding three mutual funds for a really long term at most you’d go up to five I’m also going to name these mutual funds and you know by name these mutual funds I think within each category there are more than two three good funds that you can hold but why I’ll do that is I’ll tell you where you could go with an index option or with an ETF and where you should look at holding an active mutual fund, but three mutual funds for your core portfolio and two to three mutual funds for your satellite portfolio. Core portfolio being something that does not change for a really long term. This is where you start your SIPs and let them run. and satellite portfolios where you don’t have your SIPs running but you time to time keep you know investing and switching from one fund to the other based on you know your calls on the market. So coming to the second question how should you structure your mutual fund portfolio? I think uh as I said for me having three funds for your long-term core portfolio which is where you can have 70% of your allocation is more than enough diversification. you may go up to a fourth fund and that really depends on the kind of investor you are because you know the the thing is if you’re holding more than let’s say four five mutual funds you’ve got two large caps or two midcaps chances are that you’re investing in the same stock via different mutual funds you know if you’re holding um ICIC blue chip fund and an HDFC top 100 essentially you’re holding the same stocks through different mutual funds this is particularly true for large cap stocks and I think it goes into how SEBI defines large cap, midcap and small cap. So this is how SEBI defines it. The top 100 stocks by market cap from stock number one to stock stock stock number 100 that’s that’s your large cap stocks and then 100 to 250th being midcaps and anything above that being small cap. So for large cap funds there would be a lot of duplication of the stocks that you end up holding. So this is one space particularly where you should never hold you know two or three funds because essentially you’ll end up holding the same stock again. This is where I’d like to come back to Deepak’s question from from Twitter. Now he says you know if you’re investing for 10 12 years and you know midcaps are going to grow 16 17% or maybe 15 16% whatever whichever year he looked at it they definitely grow higher than large caps. Should you not just invest in midcaps and keep running your SIPs in midcaps? You see the answer uh is yes and a no. I say yes because if you really have a heart of metal where you would not be bothered by short-term market movements, you know, you can stay invested for a long term, you’re not unlikely to need money in between and you don’t want the stability of a large cap or a flexi cap fund, I would say sure, go ahead. What happens is that the human emotion is such that when markets fall, midcaps can fall up to 30 40%. So you’ll see your overall portfolio falling quite aggressively when you know there is a uh downturn in the market, a 20% correction or a crash. That’s when you’ll see your portfolio is down 40% from what it where it was 3 4 months ago. And that’s where you know having a large cap or a flexi cap kind of fund in your portfolio cushions it against that fall. So it falls a little less than what a midcap index would fall. But if that’s something you can digest, I actually agree with Deepak. You know, if you’re investing for a really long term, particularly the way I’m suggesting that you have two to three thematic funds and then three long-term funds, you should ideally stick to midcaps and small caps. It would work beautifully. But you have to be prepared to take the kind of volatility if you invest in stocks other than through mutual funds. If you’re investing in direct equity and you’re buying a lot of large caps, which I think you should do because, you know, personally, I don’t think there is any great science in investing in large caps, the real reason why you would want a fund manager to work for you is because he can look at midcaps and small caps. He can hunt those down, especially 250th market capitalization and above. So, in short, I agree with that. So, keeping that in mind, you know, if I had to deise a portfolio, these are the funds that I would choose for my midcap portfolio. I would like Motila Losal Midcap fund. This is a top performing fund in its category. This is the fact sheet of the fund. These are the stocks they’re holding. And in addition to this, I would choose another fund which I have really liked for a long time. I’ve been investing it for many investing in it for many years. I’ve suggested this to a lot of my clients. It wasn’t placed as high as it is today. It has slowly moved up the ranks. My clients would tell you I’ve been really positive on this. is the Invesco midcap fund and these two funds the Motila loal and invesco midcap fund you can actually invest equally in both of them because I’ve realized and I’ve seen that the allocation they have to stocks is quite different for each fund look at the allocation to invest midcap fund there’s no overlap so you’re not holding the same stocks via two different funds as is the case when you end up buying like a large cap fund as I suggested or as I said earlier when you I ICIC a blue chip fund and HDFC top 100 you’ll end up holding the same stocks. This is not the case. These two midcap funds are actually both market leaders. I mean amongst the top quartile I think mutila loal is fund number one right now and invesco midcap is amongst the top three four funds if you look at threeear or 5year return for both these funds and excellent allocation for both of these funds. So for midcaps these are the two funds I’ I’d recommend that you buy. For small cap I would again go with a fund which is a market leader which is Banhan small cap fund but I would just stick to one. So you know if you were constructing a portfolio as I said five funds is enough. Three of these could be you know Banhan Small Cap, Invesco Midcap and Motila Los Midcap fund. If you’re an aggressive investor or by aggressive I mean an investor who’s investing for a very long term this is it you don’t need to do anything else. Now I’ll come to the point of before I come to the third point of the video I’ll come to whether you should invest in index funds or ETFs over actively managed funds. You see I keep hearing a lot of people talk about the fact that most fund managers don’t even beat the index against which they’re being compared. This is not true. I think if you look at uh uh the top 10 midcap funds, you know, you can go to screener, money control, whichever source you want to look at. If you look at the top 10 midcap funds, pretty much everyone would outperform the index under against which they’re being compared, whether it’s large cap category, midcap category, small cap category, I’ll tell you what happens. It’s true that most fund managers as a whole, you know, there’s hundreds of funds. A majority of them don’t outperform the index like against which they’re being they’re being compared. But that’s not true for all the funds. You know, just stick to the top 10. They move the fund number seven would become fund number one or two and so on. You know, top three funds will go down. But within the top seven, eight funds, they all outperform their index and by a huge margin. Actually, I’ve actually compared midcaps and large caps. They outperform, you know, a large cap fund has outperformed the Nifty50 by a good 6, 7%, no matter which fund you look at in the top 6, seven. So, I really don’t know uh where is the case for ETFs and index fund investing against active fund in an emerging economy like India. Yes, the expense is low for index and uh ETFs. So maybe that’s why people recommend that you should invest in that. But you know you look for a midcap fund or a small cap fund with low expense. These two funds that I have spoken about you choose a direct option in that the expense is fairly low. Uh I don’t see any merit in going ETF or index route. I do feel that actively managed funds in India particularly in small cap and midcap space will keep outperforming the indices against which they’re compared. And before I go to the next segment, I think I should cover this. If you were a long-term investor who’s looking to make a portfolio of let’s say three to five mutual funds, and in the next part I will come to the thematic funds, then I think these three funds would be enough that you need to buy. But if you were more of a conservative investor and you invest essentially only in mutual funds, no allocation to equities, no large caps that you want to buy on your own, cuz I think if you’re buying stocks, large cap stocks is something you can buy on your own. You don’t really need to go through a mutual fund route. But if you’re not and you just wanted to make a comprehensive complete mutual fund portfolio, then maybe you can add one more fund out of Nippon multicap fund, which is again a category topper. A multicap fund invests equally between large, mid and small. So 33% in large caps, 33% in midcaps and 33% in small caps. Or you could choose you know the evergreen parag flexi cap fund where you also get allocation to US stocks, overseas stocks. It’s one of the best performing funds for a long time and there is a lot of flexibility which the fund manager has to you know go choose between not just overseas stocks but between stocks from different market capitalizations in fact if you were not investing in thematic funds which I’ll come to in the next part then these five funds which are spoken about you know parakar flexi cap nippon multicap banan small cap and the two midcap funds which is mutilos midcap and inves midcap this would be enough and a very good portfolio to invest in for a long term.

So coming to the fifth question that I spoke about how often should you look at your mutual fund portfolio? Now for your core portfolio, I think you should not look at it before 12 to 18 months. And I think the only thing you’re looking at even when you look at your portfolio is whether the fund is performing in line with its historic performance and it’s not severely underperforming its peers or there’s no problem with the fund as such. you know, if there’s any uh crazy news about the fund or something’s going wrong with the fund house, that’s the only time where you’d want to withdraw and move to another fundhouse. And again, that would be a midcap fund being moved into a midcap fund of another fundhouse. And for your thematic portfolio, I would suggest you look at it at least once in 6 months. You don’t have to sell it once in 6 months. Why you’re looking at it every 6 months is to see whether the fund is, you know, outperforming the index of that fund. And this is where you can look at ETFs and index funds. And I’ll tell you why. You know, if you’re uh looking to buy into small caps and you which is stocks, small cap stocks on your own and you want to pick up a stock because you’re really positive on that sector and that’s you know you follow a top down approach. You’re positive on a stock. So you want to buy that stock. I would say just buy that stock. But since you’re positive on that sector, just buy the index. just buy an ETF or you know if you’re positive on technology just buy nifty IT index the reason is the expense ratio is the lowest thematic funds in mutual fund category have a very high expense ratio and uh essentially for no reason because you know a thematic fund would essentially end up investing in those limited number of stocks that you have so if you look at the fact sheets of most thematic funds it’s the same stocks you know talking of IT for instance it’s the same 15 20 IT stocks that you’d Okay. So if you’re positive on thematic funds or if you’re positive on a particular theme or a particular sector in the market just buy an index of that. So right now I’m really positive on two themes banking and technology. So I’m buying an ETFs and index funds in banking and in technology for myself and for my clients. Why I took the example of a specific stock in a sector that you like? If you like that, sure, go ahead and do, you know, 1 one and a half 2% allocation of your portfolio in just that one single stock. But don’t let that, you know, get in the way of you changing or making any difference to your mutual fund portfolio. If you’re positive on a sector, just have 20% of your allocation or 30% of allocation of your entire mutual fund portfolio to thematic funds and buy those. A few years back I was really positive on PSU and I think that’s where I made a lot of profit. PSUs really ran up. I made that switch about two years a year and a half back when I moved into healthcare and right now if you ask me I’m positive on banking and technology. So that 20 30% allocation for clients that I have and even for myself was essentially into technology and banking all my clients who were watching this would know that um you know when I started buying technology not many people believed in it last one or two weeks uh I feel like that the trend is we we’ll see how it goes but yes to answer the broad question of uh how often should you look at your portfolio you know it’s good to look at your portfolio once a year your core portfolio uh also to increase your SIP allocations. You know, from time to time, you should, you know, as your income level grows, particularly if you’re between the age of, let’s say, 30 or 55, from each passing year, you may want to increase your SIP amounts by, you know, 2,000, 3,000, 5,000 rupees, maybe 2%, 5%, 7% of your amount. And believe me, you will you will realize in the next few years how much difference does that make. So, look at your core portfolio once a year. Look at your thematic portfolio every 6 to 8 months and that would be a good way to keep track of your portfolio. And finally, I’ll cover this one more question which a lot of people have asked me should you invest in stocks directly or should you invest in mutual funds? And I always say why not do both? I mean the the thing I’ve seen is again I’m talking from all empirical evidence and this is extremely important. Just keep these stats in mind. All empirical evidence suggests that people who invest via mutual funds, they end up making more money with their mutual fund portfolio than they do in their stocks portfolio. And in my experience, I’ve always seen when I look at client portfolios, I’ve always seen that happen. Even though the clients feel otherwise, clients who are making more money in mutual funds would probably feel that, you know, they’re making more money in their stocks portfolio. That’s not the case. 70 to 80% clients end up making more money in mutual funds. that I think the reason is they stay invested in funds. I’ve not seen many clients who stay invested in stocks beyond 3 4 5 years. Very few clients have stocks which they bought 10 years ago 8 years ago. Mutual funds there are many clients who bought it in 2015 16 even before and they’re still running their SIPs in those. So when you buy stocks, you just end up selling them and the stock move 40, 50, 60% higher. And what you do is you end up buying stocks which have not moved up and they’re still underperforming or below your buying price. So that’s like good money being thrown after bad money. And what happens is stocks that have moved higher. You’ve sold those and they keep moving up higher and stocks that you buy to average, they just don’t perform. With a with a fund that does not happen. So have both. have 60% 50% whatever allocation of your total financial assets through funds and you know feel free to invest in stocks directly see how it goes for 4 5 years life is very long you may want to change your allocations with time also I think you should work with a financial advisor I’m not selling myself go work with any financial advisor all ampy data suggests SIP [snorts] run longer when you go through a financial adviser maybe because he makes sure does not let you stop it does not let you switch. So people don’t trade their SIPs or their direct plans like they do in case of stocks. So you know if you don’t want to do uh regular plans you want to do direct plans have terms of engagement how you want to work with an adviser but having someone by your side even if it’s a friend it’s like you know training in a gym with someone would actually give you better results than doing it on your own. So I do think to answer both these questions. Work with an adviser if you can and do both. But if you’re confused, start with mutual funds and then switch on to stocks. So that was my view on mutual funds to answer some of the questions that I’ve been uh hearing about. Please leave a comment, like, share, subscribe, and let me know what you’d like to know about more. [bell]