Promising Semiconductor Stocks In India That Should Be In Your Watchlist

Promising Semiconductor Stocks In India That Should Be In Your Watchlist

Semiconductors power the modern world. They are at the very essence of everything we interact with daily in our life. It powers smartphones, pads, and laptops that are inseparable from our lives. Everything from banking to medical infrastructure to financial markets, from household appliances to cars and aircraft is made possible through a tiny circuitry embedded atop a silicon plate. The device you are reading this blog on and the systems that make this blog available on the internet requires a chip working somewhere in the background. What we are getting at is that chips are important…very important! In this …

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5 Things to Know about Momentum Stocks

5 Things to Know about Momentum Stocks

Momentum is a concept that would excite every trader, isn’t it? Stocks with significant momentum depict strong price movements and help traders decide their course of action. So, if you are looking for momentum stocks, this article is just for you. Here, you will learn about momentum stocks, strategies that you can adopt for trading these stocks or investing in them, and a lot more. -What are Momentum Stocks? Momentum stocks are those stocks you need to identify for momentum investing; these are those stocks that have been gaining significantly, especially over a short period, and showcasing the potential for …

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Are Your Mutual Funds Overlapping?

Are Your Mutual Funds Overlapping?

Investors use mutual funds to avoid putting all eggs in the same basket. When you invest in a mutual fund, you effectively invest in multiple stocks on a fractional basis. This diversification helps you stay relatively safe from market volatility.

The problem arises when you invest in multiple mutual funds having the same underlying stocks. This is what we call overlapping mutual funds. There are numerous downsides to this overlap. Let’s understand this in a more detailed way.

Mutual Fund Overlap: Here’s a Simple Scenario

Imagine you have invested in two mutual funds – UTI Large Cap fund and SBI Bluechip fund. You thought that since the names of the funds are different, the underlying stocks will be different as well. But that is not the case.

These two funds have a lot of overlapping underlying stocks –

As you can see, the portfolios of these funds are made up of stocks that are common in both.

The Problem With Overlapping Mutual Funds: Less Diversification, More

Volatility

Investing in mutual funds with overlapping underlying stocks makes your entire portfolio susceptible to market volatility.

  • If your mutual fund portfolio has too much overlapping of underlying securities, it means that you have more exposure to those overlapping securities. Hence, if the price of any of these overlapping securities falls sharply, it will have a more pronounced negative impact on your overall portfolio. In a nutshell, you will not be getting the benefit of diversification if you invest in overlapping mutual funds.
  • Another problem with investing in overlapping mutual funds is the fact that it makes your overall investment journey expensive. How? Suppose you invested in mutual funds A and B, which have a significant number of overlapping securities underneath. Both of these funds charge you in the form of an expense ratio. This means that you are paying two funds to manage the same set of stocks. Imagine if there was no overlap in these mutual funds. In that case, you would have been paying two funds to manage two different sets of stocks, which is more logical.

There are many free tools available on the internet that help you see if the mutual funds you have invested in have overlapping securities. These tools will help you understand the percentage of the overlap between two mutual funds schemes.

Why Overlap Happens and How To Avoid Portfolio Overlap?

There are several reasons why portfolio overlap happens:

  • Portfolio overlap can be prominently seen when the investment universe is small like in the case for large cap funds. There is a finite amount of large cap stocks (top 100) that these funds can invest in as per SEBI mandate. As a result, different largecap funds have the high likelihood of investing in the same underlying stocks.
  • Secondly, funds with the same investment theme can have portfolio overlap. Why? Because the theme or sector is the same and there are only a limited number of stocks there. For example, technology funds have to predominantly invest in technology and IT stocks. So different technology funds have to choose from the same universe of IT stocks.
  • Lastly, different funds from the same AMC can have portfolio overlap because the investment philosophy of the AMC. An AMC can have a broad investment philosophy that they apply to all of their funds. Hence, even different categories of funds can have overlapping stocks.

 

So, how to avoid mutual fund overlap?

Invest in mutual funds across different categories. For example, both LIC MF large-cap fund and Edelweiss Large-cap fund invest in large-cap stocks. These two funds are in the same category. As a result, they have a whopping 68% portfolio overlap.

Let’s go back to the example of UTI Large Cap fund and SBI Blue-chip fund. The category of these funds is the same (and as we said, Large cap funds have a mandate to invest in the top 100 stocks only as per market capitalisation). As a result, these funds have a huge overlap.

 

To avoid this, invest in funds from differing categories.

Interestingly, many AMCs have their own investment philosophies that they stick to. Thus, when you invest in seemingly different funds from the same AMC, there is a possibility of portfolio overlap.

Here’s an example. UTI Large Cap funds and UTI Flexi Cap funds are funds under two different categories. But since the funds are run by the same AMC having the same investment philosophy, a sizeable percentage of overlap can be observed.

 

  • So, make sure you invest in funds from different AMCs – don’t stick to just one.
  • Lastly, review your mutual fund portfolio periodically. This is specifically true in the case of flexicap and multicap funds and other actively managed funds. The holdings of these funds change frequently. This change in holding might gradually create an overlap between two such funds.

How Much Is Too Much Overlap in Mutual Funds?

Usually, you can’t avoid portfolio overlap to a certain extent. It’s likely that there will be some common underlying stocks in mutual funds that you have invested in. You just have to make sure that the overlap is not too much. But how much is too much? There is no standard rule in this regard, but it’s advisable not to have more than 30% to 35% overlap.

In the end…

Diversification smoothens the bumpy road of investment. And one of the primary objectives of investing in mutual funds is to achieve this diversification. It keeps your investments safe from volatility. You don’t have to care if one or two stocks go down. But when these one or two stocks grab the lion’s share of your overall mutual fund portfolio, that’s when the problem begins. In such a scenario, the price movement of these few stocks affects the stability of your entire portfolio. Always make sure that your overall portfolio does not have too much overlap. The journey of wealth-making is a long one. You don’t want a bumpy road.

 

-Nischay Avichal

 

 

 

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Exploring Restoration Benefits in Health Insurance

Exploring Restoration Benefits in Health Insurance

Without a doubt, health insurance is the shield that can help you meet unexpected and large medical emergencies. In the absence of a comprehensive health cover, you would have to rely on your savings or even worse –high interest personal loans. Using your savings means sacrificing your other essential goals– your daughter’s education, your retirement or the dream house you were panning for. Hence, buying a health insurance is crucial for your financial health. But buying a policy is also a tough task– a lot of insurers to shift through and lot of features to get your head around. In …

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How Much Percentage of Indian Population Invest In Stocks?

How Much Percentage of Indian Population Invest In Stocks?

India’s story is the story of growth. Businesses across the country are riding on innovation, technology and demographic dividend to grow big. And where businesses thrive, stock market investors thrive as well. The number of Indian stock market investors has been abysmal for decades. However this is changing now. The percentage of Indian investors investing in stocks has been increasing steadily. Total Number of Indian Stock Market Investors Thanks to the popularity of smartphone-based investment apps, India has been witnessing a steady surge in the number of stock market investors. According to a report published in Business Today, as of …

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Exploring Pros & Cons of NSCs

Exploring Pros & Cons of NSCs

Are you on the lookout for a reliable investment avenue that provides stable returns while ensuring the safety of your hard-earned money? National Savings Certificates (NSCs) might just be the solution you’ve been searching for. In this article, we’ll delve into the pros and cons of NSCs to help you decide if they align with your financial goals. Pros of National Savings Certificates: Fixed and Assured Returns: NSCs offer a fixed rate of interest, providing investors with a predictable stream of income over time. It is backed by the Government of India. The assurance of the government backing makes them …

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How Quickly Can You Get Your Money Back From Mutual Funds? SEBI Stress Test Tells You The Answer

How Quickly Can You Get Your Money Back From Mutual Funds? SEBI Stress Test Tells You The Answer

Back in 2020, as COVID-19 raged, people started panic selling. In this chaos, one mutual fund AMC found it hard to keep up with this sudden surge in redemption. Six of its debt funds did not have enough liquidity! As a result, the fund house had to suspend redemption from and investment in these funds. The result? A lengthy legal battle between the fund house and the investors. It took three years for these funds to be completely liquidated.   SEBI Stress Test For Mutual Funds   What if something like this happens again? The latest directive comes on the …

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All About SM REITs: Fractional Real Estate Investment is Here!

All About SM REITs: Fractional Real Estate Investment is Here!

Real estate has long been considered a cornerstone for wealth creation and portfolio diversification. However, for many retail investors, access to this lucrative asset class has been limited by high entry barriers, lack of transparency, and regulatory complexities. Recognizing this gap, the Securities and Exchange Board of India (SEBI) has taken a significant stride by introducing new regulations tailored for Small and Medium Real Estate Investment Trusts (SM REITs). The recent notification from SEBI regarding SM REITs particularly targets retail investors and aims to democratize access to high quality income generating real estate projects. In this blog, we delve into …

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Can I Withdraw From NPS Before My Retirement?

Are you considering making early withdrawals from your National Pension System (NPS), but feeling unsure about the rules and implications? Many individuals contemplate this option as they navigate their financial journey. Whether it’s for unexpected expenses or to meet any other financial goals, understanding the ins and outs of withdrawing from NPS before retirement is crucial. In this blog we will delve into the intricacies of NPS withdrawal rules, covering partial withdrawals from Tier I and Tier II accounts, conditions for such withdrawals, and premature exit options. NPS Partial Withdrawal Rules NPS offers two accounts – Tier I and Tier …

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Navigating Debt Mutual Funds: What You Need to Know Before Investing

Navigating Debt Mutual Funds: What You Need to Know Before Investing

Are you considering investing in debt mutual funds to diversify your investment portfolio and potentially earn steady returns? Or looking to invest for your short- or medium-term goals? Before you take the plunge into the world of debt funds, it’s essential to arm yourself with knowledge about how these funds operate and the risks involved. Debt funds offer a plethora of options (16 categories to be exact) catering to various needs, but understanding their intricacies is paramount to making informed decisions. From the dynamics of the NAV movement to the risks like credit and interest rate fluctuations, we’ll learn everything …

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