A reader asks, “We have a retirement corpus of over Rs. Ten Crores. While we agree that having fewer funds is more manageable, we are nervous about stacking one cr in each fund, debt or equity. Do you think that fear is unfounded?”
The number one goal in portfolio management is a peaceful sleep. So as long as your actions are suitable and reasonable for your goals, you should do what you are comfortable with. Also, see: Is something wrong if I hold 25 mutual funds?
So if holding one Rs. One Crore in a single fund does not sit well with you, do not. There is no harm in holding 20 funds with Rs. 50 lakh each or 40 funds with Rs. 25 lakhs each across different AMCs. It is a personal preference, just that your spouse or partner should know about all holdings. All holdings should have appropriate second holders (some your spouse, some your children etc., as per your wish), and all holdings should have nominations. Plus, it would be best to write a will and ensure concerned parties are aware of this.
Relevant resources for these steps:
- How can your parents easily implement “Who gets what?” (legacy planning)
- How to help our life partner manage money in our absence.
With that out of the way, let us address the fear itself. Is this fear rational? There are two aspects to this. (1) Concentration risk and (2) Scheme-specific or AMC-specific risk.
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Concentration risk is when too much money is put into the same scheme, affecting portfolio performance. But Rs. 1 Crore out of Rs. 10 Crore is only 10%, which may not be classified as concentrated exposure by most investors (especially if they know only about the 10% exposure and not the value). Then again, it is a personal definition of too much exposure. So concentration risk is a rational fear.
AMC or scheme risk can be two-fold. One is due to the unconventional choices made by the fund manager and the resulting consequences. For example, the redemption pressure faced by the Franklin Schemes. It can be argued that it is also part of concentration risk, but I would prefer to distinguish normal or day-to-day market risk (due to too much exposure) and anomalies.
The other is due to the “safety of the capital”. Or, in other words, the fear that someone will take our money and run away or the AMC itself would fail (like a bank).
A mutual fund in India is set up like a trust. A trust is an arrangement involving three parties (unlike a bank): the unitholder (or investor), the mutual fund company (AMC) and the mutual fund trustee.
The owner (sponsor) of the mutual fund creates a board of trustees responsible for overseeing the fund’s operations. They will have to ensure compliance with SEBI regulations. A custodian registered with SEBI holds the assets in the fund and is answerable to the trustees.
Two-thirds of the trustee board must not be part of the sponsor company. This also applies to half of the AMC directors. This arrangement makes it extremely difficult for the mutual fund to run away with unitholder money or violate SEBI regulations.
The question of a mutual fund not having enough money to pay the unitholder does not arise as the gains or losses made by the fund manager are directly passed on to the mutual fund. Also, there is monthly portfolio disclosure and periodic audits, which have to be submitted to SEBI.
Therefore, a mutual fund cannot fail like a bank. It can, however, get into trouble in other ways.
For example, SEBI does not directly control the choice of investment. These can be within subsidiaries of the sponsor and therefore involve a conflict of interest. Also, as recently witnessed in the Zee-Essel bond case, fund houses could agree with bond issuers about not devaluing bad bonds: Eroding Trust: Are mutual funds really market-linked products? SEBI then issued a show-cause notice in this regard.
In principle, a mutual fund can deviate from SEBI regulations and even commit fraud. So AMC or scheme-specific risk is also a rational fear.
Therefore, it makes sense for investors to spread their investments among different AMCs and funds. However, there is no right or a wrong number of AMCs or funds. It is entirely up to the investor. So pick a number that will give you peace and stick with it. Don’t second guess and ask others. That is when the confusion begins.