How much importance should i give to portfolio concentration ratio when choosing a mutual fund?
Portfolio concentration ratio tells the investor the percentage of the fund’s investment in top five sector or areas. Normally mutual funds have a portfolio concentration ratio between 30-40% for top five sectors. As an investor it is essential to choose a fund which balances the thin line between adequate portfolio representations without going in for excessive diversification. There are other factors including exit load, treynor’s ratio, standard deviation, expense ratio , fund manager managing the fund and past performance of the fund that must all be checked along with portfolio concentration ratio.
Why do mutual funds have exit load? Is it not cheating the customer charging money to withdraw own invested money?
Since mutual funds work on the principal of investing pooled in sum of funds from various investors, exit loads are usually put in place to discourage unnecessary withdrawals. As an investor one must always choose funds with a low exit load. Exit load ranges from 1 to 2 % depending on the fund. What you withdraw from the fund is not only your own invested money but the increased share of money that you now own as per your fund NAV. The fund manager and the mutual fund team management worked hard to invest the money in the right place leading to substantial returns. So exit load is definitely not cheating the customer but more as a deterrent to withdraw funds from the MF frequently.
If you are an investor with a moderate risk appetite, portfolio concentration will be important. If a Mutual Fund is overweight on a single sector or stock, it is best to avoid investing in that fund as it will be risky for you. Also, Mutual Funds may have different names but they could invest in the same stocks. So, you need to know how much company-specific risk or sector risk is present in your portfolio. After all, you don’t want your portfolio to be overly dependent on a few stock or a single sector. Portfolio overlap and concentration defeats the objective of diversification. So, you must look at these before investing in Mutual Funds.