Should you copy a mutual fund’s portfolio?
“Mutual Funds Sahi hai” is something we hear every now and then. Yes! mutual funds are good investment options for certain reasons. However, as an investor, one may think to mimic the mutual fund portfolio to avoid the expense ratio or exit fees.
Do you think copying a mutual fund’s portfolio is the right thing to do? Continue reading to know if you should copy a mutual fund’s portfolio or not!
Mutual funds are the most popular mode of investment for a large number of investors. They are basically investment vehicles that pool money from investors and then use this money to invest in company stocks (equity), bonds (debt), or other instruments (like other mutual funds).
What are the benefits of mutual funds?
- Experienced and expert fund management: Mutual funds have the best fund managers who manage the Scheme’s funds and an excellent research team that perform detailed research and analysis on company stocks or debt to select the investment that is best suitable to the fund’s investment objective.
- Reinvestment of Dividend: When the stocks in a portfolio earn dividends, mutual funds provide a reinvestment option wherein the investor gets allotted additional units of the mutual fund scheme.
- Optimized risk: In mutual fund schemes there is no concentration in any particular stock. With proper diversification and periodical rebalancing, mutual funds help reduce or optimize the overall portfolio risk and volatility.
Should you copy a mutual fund’s portfolio?
All mutual fund schemes provide a complete monthly disclosure that gives details on the fund’s portfolio holdings and their proportion of holding.
Yes, by looking at the holdings and their ratios it is easy for an investor to copy the same, however, it is not ideal. Let’s see why: –
- Choice of strategy: After thinking of copying a mutual fund’s portfolio, the question that now arises is which style to copy. Every Fund Manager and Fund management team is different even within the same category. Moreover, different funds have different investment objectives and different investment strategies and styles. So, whose strategy will you follow?
- The fund manager’s thought process: An investor can always copy a fund’s portfolio but not the thought process of the fund manager that goes behind it. It’s easy to find out the stocks that are bought or sold by the fund manager in the monthly disclosures. However, there is an entirely different thought process that goes behind the decision-making. The scheme mandates and risk management policy of the fund house influence the stock selection and their weightage decisions.
- Periodical rebalancing: While choosing a stock for the mutual fund scheme’s portfolio, the market situation is kept in mind. The markets are well analyzed to find out the opportunities to invest. Also, the market never stays the same. So, based on market conditions, the fund managers periodically rebalance the portfolio and alter the stock and sector weights to ensure the scheme’s portfolio is in line with the investment objective.
- Log in scheme’s disclosure: Mutual funds disclosure comes every month. However, the fund manager may buy or sell some security in the middle of the month. When you get to know of the transaction, it would have been around 5-10 days and the market price of the share will not be the same.
- Cost of investment: Some stocks like blue-chip stocks are very expensive and not all investors may be able to invest in them. Mutual funds provide the investor exposure to such stocks at a much lower price. Mutual funds when pooled in money, invest it in such stocks and offer a fractional exposure to the mutual fund exposures. Moreover, what stocks will you buy? There may be over 20 stocks in a mutual fund’s portfolio. Can you purchase all of them? Mutual funds help you not burn your pockets to get such stocks in your portfolio.
Fund Managers exist for a reason they make your investment journey easier and smoother. These fund managers have good experience and expertise in handling such large volumes of funds.
They have specialized in this field and have a well-experienced research team to support them as well.
You always have a number of funds to choose from based on your goal, risk appetite, and investment horizon. You can also evaluate a fund manager’s performance by their fund’s up-side and down-side captures.
Remember to always make your investments easier and not more complicated. Why worry when you have a good management team that is actively managing your invested money?
Consult an expert advisor to get the right plan
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