Sunday, April 30, 2006


Diverfification beyond a point is meaningless. For
sure you don't need to put all the eggs in one basket but if all the
baskets are under one roof which may fall any day then you don't
achieve anything out of your planning.

Sometime back I wrote a Note on Over-Diversification. Posting the same

To explain let us assume that the funds are invested in 20 best
opportunities available. Had the investment been concentrated to 10
best opportunities and the results turn out to be in sync with the
estimation, the gains from a portfolio of top 10 companies would be
far higher than the one with 20 companies. The risk in the latter
would be lower but not significantly less because a substantial
portion of risk comes from the risks inherent in economy and capital

I seek to achieve an adequate level of diversification to achieve
`Safety of Principal' and high returns. The mutual funds due to large
size can not deploy all their funds in 10 companies. The results is
over diversification and lower returns. For example as of June 30th,
2004 Morgan Stanley Growth Fund had invested in 46 listed, 7 unlisted
and 3 ADRS. The results were obvious. In the 10 years since inception
the NAV of the fund increased from 10.00 to Rs. 18.47. The fund has
paid dividends of 4 Rs during this10 year period.I believe that the
mathematical odds are stacked heavily against such over diversified
portfolio. The managers of the fund did make money for themselves with
1-1.25% management fee and annual administrative expense not exceeding 3%.

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