Most people consider returns when investing in mutual funds. Investors with more experience may consider some additional factors. The types of returns could include rolling returns, volatility, etc. A fund’s portfolio contains many stocks that most investors overlook.
Accordingly, a fund with too many stocks could generate underperformance. Does this situation come into action in the world of investment? Is it a smart choice to invest in mutual funds starting with small numbers?
To help you address all these questions we have come up with a dedicated article that covers primarily about investment will lower the number of stocks performing better.
Table of Contents
What Criteria Did We Use To Select Mutual Fund Categories?
There are several criteria that help investors in choosing the mutual fund categories. Let’s dive further to explore the criteria to keep on eye on while selecting mutual fund categories:
- To take a first step, you first need to determine between Large-cap funds, mid-cap funds, small-cap funds, and flexi-cap funds etc.
- Moving forward, it’s time to evaluate the portfolio’s stocks and performance given in the past years.
Now, the funds will be distributed into the following four buckets:
- Those funds which carry 50 stocks or fewer make up the first bucket.
- After that, schemes with 51-75 stocks are considered.
- As for the third bucket, it consists of funds with 76 to 100 stocks.
- Lastly, there are schemes with more than 100 stocks in them.
What is the average number of stocks in top-performing large-cap funds?
First, we checked out large-cap mutual funds. The table below shows the number of schemes in different buckets. For example, eight schemes had less than 50 stocks in their portfolio in the last six years.
To classify funds in these buckets, we looked at the number of stocks in the scheme’s portfolio for the last six years, and then their median was used to place them in one of the buckets.
After placing the funds in their respective buckets, we found that the funds with up to 50 stocks did better than those with 50-75 stocks.
The schemes with up to 50 stocks had an average rolling return of 13.51%, whereas those with more than 50 stocks had 13.05%. So the difference was just about half a percent, which isn’t massive. No schemes had more than 75 stocks.
How many stocks do top-performing mid-cap funds have?
Surprisingly, we got similar results. Mid-cap mutual funds with up to 50 stocks did the best here. Their 3-year average rolling returns were 17.39%. The average rolling returns of funds in the next bucket (50-75 Stocks) were 16.69%. The returns were even lower for funds with 75-100 stocks in their portfolio.
What are the number of stocks that top-performing small-cap funds have?
When it comes to the small-cap mutual funds category, most of the funds held anywhere between 50-75 Stocks in their portfolio. But here, too, funds that had up to 50 stocks have done the best.
The funds that had up to 50 stocks in their portfolio had an average rolling return of 26.14%, and that of funds with 50-75 stocks was 22.22%. The performance went down further as the number of stocks in the portfolio started to go up.
What are the number of Mutual Funds Should You Invest in?
It usually depends on investors. But you need to make sure that you closely understand the markets and have expert knowledge about mutual funds. If so, then the ideal decision would be to own the following mutual funds:
- Large Cap Mutual Funds: Up to 2. Maybe 3 at best. Beyond that, it doesn’t make sense as there will be a great overlap in the shares owned by your mutual funds.
- Mid-Cap Mutual Funds: Up to 2. While you might get higher returns, the risk you expose yourself to is also higher.
- Small Cap Mutual Funds: Up to 2. Depending on the high risk of these mutual funds, you need to restrict yourself to a limited number of small-cap mutual funds. On top of that, it is highly advisable to limit yourself from investing a high percentage of your total mutual fund investment in small-cap mutual funds.
- Debt Funds: Usually it is 1, but 2 is ideal. A wide range of debt mutual funds come together to offer similar returns, so it does not turn you to make a move towards owning multiple debt mutual funds.
- Sectoral Mutual Funds: The frequency of sectoral mutual fund investment depends on the industry knowledge you have the upper hand on. If you lack an understanding of the specific sector, it is better to take off your idea to invest in sectoral mutual funds.
Are Mutual Funds with a lower number of stocks better?
If we go as per the reports, there is no set statement that states that mutual funds with lower numbers of stocks perform better. The primary reason behind these trends is underperformance due to over-diversification. However, the stocks in a portfolio rise, which makes it challenging for investors to do well, and its returns also dilute.
Every investor must keep in mind that a single parameter should not be a directive while choosing mutual funds. Every investor must follow the right set of elements to pick funds, and you can consider adding this as one of the parameters to your framework.
Further, there are a few funds that have done well despite a higher number of stocks in their portfolios.
Conclusion
Get your journey towards investing and do not start worrying when your fund starts to increase the number of stocks in its portfolio. Rather, you should look at the underlying reason for the increase in the number of stocks in the portfolio. For example, when a fund becomes popular and its AUM starts growing, the fund manager needs to increase the stocks to be able to deploy its assets.
Please share your thoughts on this post by leaving a reply in the comments section. Also, check out our recent post on: “What are Micro-cap Mutual Funds? All you need to know“
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Disclaimer – This article is for educational purposes only and by no means intends to substitute expert guidance. Mutual fund investments are subject to market risks. Please read the scheme related document carefully before investing.
