Navigating Concentration Risks in Mutual Fund Portfolios

In recent months, the stock market has witnessed several companies, spanning both small and Large-Cap sectors, undergoing regulatory scrutiny. This resulted in significant declines in their share prices. Notable examples include Kotak Mahindra Bank, HDFC Bank, and Bajaj Finance, all of which experienced sharp price reactions due to regulatory actions and earnings announcements. 

The impact of these price declines isn't limited to individual stockholders; it also extends to mutual fund portfolios. For instance, Kotak Mahindra Bank, held by 357 funds as of March 2024, is spread across various fund categories, including large-cap, Small-Cap, Mid-Cap, and arbitrage funds. Similarly, Bajaj Finance, held by 322 funds, saw a decline of more than 8 per cent post-results, affecting the portfolios of numerous investors. 

While investors may have diversified their investments across different categories of funds, there's a likelihood that their funds hold similar stocks in various funds. For example, Kotak Mahindra Bank is held by even small-cap dedicated funds. Therefore, a fall in a single stock could potentially impact the perceived diversification of their fund portfolio. Investors need to look beyond fund categories and assess if their portfolio is adequately diversified. 

Monitoring holdings and fund performance closely is paramount. If concentration risk becomes a concern, investors should consider rebalancing their portfolios or exploring more diversified fund options. With a wide range of mutual funds available, catering to various investment goals, diversifying across asset classes beyond stocks can provide stability and mitigate overall portfolio risk. Bonds, real estate, and commodities are alternative assets worth considering for a balanced investment approach. 

As always, staying informed and proactive is crucial for navigating market uncertainties and ensuring the long-term success of an investment strategy. 

Shashikant Singh
Executive Editor