The fact that approximately 95 percent of the corpus of 427 active mutual funds is invested in only 382 stocks is indicative of a phenomenon known as concentration risk.
- Lack of Diversification: Mutual funds are typically viewed as investment vehicles that provide diversification by holding a broad range of assets. However, when a majority of the fund’s assets are concentrated in a limited number of stocks, it reduces the diversification benefits that investors expect from mutual funds.
- High Conviction Strategy: Some active fund managers may adopt a high conviction or concentrated strategy, which involves investing heavily in a select few stocks that they believe will outperform the market. While this approach can offer the potential for high returns, it also comes with increased risk.
- Stock Selection: The statistic suggests that active fund managers are focusing on a relatively small portion of the available stocks. Their investment decisions are influenced by their research, analysis, and outlook on those specific companies.
- Benchmark Considerations: Active fund managers may benchmark their performance against a particular index or set of stocks. This can lead to a concentration in stocks that make up the benchmark.
- Performance Impact: Concentration risk can have a significant impact on the fund’s performance. If the chosen stocks perform well, it can lead to substantial returns. However, if those stocks underperform or face adverse events, it can result in significant losses for the fund.
