The impact of having lesser stocks in a mutual fund portfolio

Arnav PandyaInvestors in mutual funds have several choices with respect to their investments and while there has been a reduction in the number of funds that are present in the market the situation has not yet been fully cleared up. What this actually means is that there are still some funds that might seem to look similar but are different and the investor often has a hard time trying to understand the difference between them. One such aspect is the number of holdings in the portfolio of the fund and whether this is a focused fund or not. Sometimes knowing the difference can make a big impact on the decision of the investor and hence this is something that needs to be considered.Number of stocksOne of the first measures that the investor should check in their equity oriented fund is the number of stocks or the holdings in the portfolio. If a fund is really a focused fund then there would not be more than 20-25 stocks that are present there while a spread out portfolio will include around 40-50 stocks. This measure is a good way to begin but one has to be careful because it is not the only thing that will give the individual a complete idea of what is happening in the fund. Experts say that the benefit of diversification ends when the stocks in the portfolio go beyond 22-24 and while adding stocks initially gives a big benefit of diversification this goes on reducing as the stocks increase. So just from the point of having a diversified portfolio once the number of stocks cross a certain limit there might not be some great benefit that comes in for the investor. However this measure is useful because used with some other details it can paint a better picture.Top holdings exposureIt is not just the number of stocks but the kind of exposure that the top holdings have in the portfolio that determines how focused the fund is. If there is a large concentration among the top few holdings then a good or bad performance in these stocks will have a large impact as far as the performance of the portfolio is concerned. If this is not the case and the amounts are equally spread out then there will not be a few drivers of the portfolio and the volatility and the changes will be less sharp. This is crucial because even with a larger number of holdings if the top ones have a large exposure then this could impact the portfolio more than other situations.Holding behaviourThere is also an impact that is felt on the performance by the holding behaviour of the fund manager and the way this is actually managed. If the fund ensures that holdings are able to grow and increase in size then this would show that there is follow up to the purchases that are made and this can go on to impact the portfolio in a meaningful way over a period of time. On the other hand if there are very quick changes that are made to the portfolio and the holdings are changed frequently then this might not yield the benefit that is actually coming through. It can make the sustaining of the returns a difficult task because it is not always possible to make quick gains and turnover the portfolio quickly for the fund manager. The problem increases with the size of the portfolio and hence is something that needs attention too. The size can also determine if the fund would be able to maintain a concentrated portfolio as a large size may make the spreading out of the investments inevitable.