Did you know that an average equity diversified fund can have as many 60-80

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stocks in its portfolio?

With mutual funds str-iving to get their act together, experts say portfolio construction, as well as composition, hold key to the success or failure of investments.

A smaller portfolio can work well, but there are risks too.

“While an average diversified fund has around 60 to 80 stocks, funds in another segment have exposure to 40 to 50 stocks. While this is diversification, the same portfolio can be managed in a better way if the right stocks are chosen to balance risks. A good way to do this is to reduce the number of stocks. We feel a portfolio of around 25 to 30 stocks makes fund management a lot easier. There is no magic number for the right number of stocks in a portfolio, but a smaller portfolio can do the job of diversification just as well,” said S Naganath, chief investment officer of DSP BlackRock Mutual Fund.

Apart from DSP BlackRock’s new fund offering Focus 25, mutual fund schemes such as Sahara Super 20 and Kotak 30 follow the practice of concentrated equity portfolios. The main risk in having a smaller portfolio is that it may see a little bit of extra volatility.

“Risk-adjusted returns for smaller portfolios can match comparatively bigger portfolios. As usual, stock selection is key. The only risk is that concentrated (smaller) equity portfolios exhibit a higher volatility within a shorter time period. That said, mutual fund investors should think long-term and not be unduly bothered by short-term volatility, if at all,” said Anil Rego, founder and chief executive officer of financial consulting firm Right Horizons.

Most concentrated port-folio mutual funds follow the weightage system in which each stock is given a certain weight.

Stocks are chosen from a universe, which will usually be limited to the top 100 or 200 by market value.

“This system ensures that big names in the liquid fund space are present in the portfolio. The smaller the portfolio, the grea-ter the likelihood that its returns will differ significantly from the market average,” said Sanjay Das, a Kolkata-based financial planner.