How concentrated should your portfolio be? India’s largest mutual fund manager has the answer

According to R Srinivasan, 15 or 20 stocks would make for a well-diversified portfolio.

The allure of finding just a handful of multi-baggers and stuffing all your money in them may sound like an exciting proposition to get rich, but the strategy is fraught with risk and is undesirable. Holding too few stocks is just as bad as having too many stocks in your portfolio, according to India’s  largest mutual fund manager R Srinivasan of SBI Mutual Fund.

He said, before joining the mutual fund industry he had tried his hand at holding too few stocks but would not recommend the strategy to anyone now. Besides, there is enough research that shows the benefits of diversification peter out beyond 15 stocks, said Srinivasan, who personally oversees assets worth around Rs 1.5 lakh crore.

He was speaking at Moneycontrol’s weekly vodcast The Wealth Formula.

Watch the full interview: The secret to buying small-caps, thinking probabilistically and much more | The Wealth Formula

According to him, fifteen or twenty stocks would make for a well-diversified portfolio. Srinivasan then shared a learning he had on concentration.

“Before I was in a mutual fund, I used to have like 70 percent or even 90 percent in one stock. I wouldn't do that (anymore), I wouldn't recommend that to anyone,” he said.

Concentration in mutual funds is a whole different matter, he pointed out. For example, in the SBI Focused Equity fund, there are 21 stocks and others would think that it was a “concentrated” fund.

“That is where I disagree,” he said.

“Concentration really is people owning around six or seven stocks with the top holding at around 25 percent to 30 percent… I wouldn’t recommend that, even I wouldn’t do that. I think 15-20 stocks is a well-diversified portfolio. I do not subscribe to owning 50, 70, 100 or whatever number of stocks,” he added.

According to Srinivasan, people own as many stocks as they can when they are confused and don’t have enough ideas, but eventually they must go deeper and own more of the ones they have conviction about.

He said, “You want to own more of what you like, and which is what I would think is 20 to 30, which others would call concentrated. I would say it (a portfolio with this number) is diversified.”

Also read: Investors should not be “too hung up on the number” or valuation multiples, says SBI MF’s R Srinivasan

“No stock is a multi-bagger to begin with. What make a difference to returns is if you spotted a multi-bagger, how much money did you put in. You have to size up your high conviction bets,” said Srinivasan.

Srinivasan then pointed to studies that showed that the benefits of diversification kind of petered out “very significantly” after the fifteenth holding.