/Stock picking with the help of mutual fund portfolios: Is it a smart strategy?

Stock picking with the help of mutual fund portfolios: Is it a smart strategy?

Investing directly in stocks is very easy, say some investors. And stock picking is the easiest step for them – they just look at the top holdings of best-performing mutual fund schemes and invest in those stocks. More enterprising ones also take cues from smooth talking portfolio managers who appear regularly on television. The bookish ones look for ideas in columns and interviews of prominent investors published in the media.

It may sound complicated, but it is not so difficult, say these newbies about direct investing. The new investors say there are may stocks that are common in the portfolios of successful mutual fund schemes. When so many good fund managers are betting on same stocks, it clearly says that those stocks are very good investments – that is what these investors who follow the strategy believe.

If they are so sure about the invincibility of those stocks and fund managers, why don’t they invest in those schemes? It would be a very simple way to take exposure to those stocks. The investors point out that most of these portfolios have around 30-50 stocks and they believe fund managers unnecessarily take exposure to many stocks to keep pace with the index, which they believe is taking away the benefits of phenomenal returns offered by some top holdings. As usual, they point out the stellar performance of HDFC Bank, Reliance Industries, to support their claim.

That means most of these investors are likely to have a concentrated portfolio in some large or mid cap stocks that they believe would do well because most mutual fund schemes own them. A concentrated portfolio comes with its own share of risks. A major fall in one or two stocks can result in heavy losses. That is one of the reasons why the schemes have made investments in other 50 stocks – such a diversification would prove valuable if there is an unexpected or sudden fall in top holdings. Sure, diversification also brings down the total returns in the portfolio.

Also read: Selling mutual funds to dabble directly in stocks? Have you done the homework?

Also, it is not possible to find out what is in the minds of fund managers when they bought these stocks. They might have bought these stocks at a certain price, they might also have a target price or stop loss price. It is not possible to find out these as fund managers are not allowed to talk about individual stocks, prices, etc, in public. A regular investor would come to know about the buy/sell in stocks after a lag. This can be a problem for investors, especially when it comes to selling stocks.

Sure, intrepid investors might come up with a solution to these issues in the coming days. Or they already have a fix on these issues.

(This article is part of a series ETMutualFunds.com has started on the issue of direct investments in stocks.)

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