‘Holdings’ are the contents or securities of an individual or company’s portfolio. Furthermore, holdings can refer to any type of investment product, such as mutual funds, stocks, and exchange-traded funds (ETFs). Let us understand the concept of holdings in greater detail, know what diversification is, and how mutual fund holdings work.
What are holdings?
Holdings refer to the various investments that an individual or entity owns within a portfolio. These can include a range of asset classes such as stocks, bonds, mutual funds, real estate, and other securities. Each holding represents a specific allocation of capital and contributes to the overall value and performance of the portfolio. The composition of holdings is often strategically chosen to align with the investor's financial goals, risk tolerance, and investment horizon. By diversifying their holdings, investors can mitigate risk and enhance potential returns. Regular review and rebalancing of holdings are essential practices to ensure the portfolio remains aligned with the investor's objectives and market conditions.
What does holding mean for individual investors?
Holding refers to the securities (equities, bonds, etc.) you own in your portfolio. An investor can have a wide range of financial products in their portfolio, including:
- Stocks
- Bonds
- Mutual funds
- Options
- Derivative products such as futures
- ETFs (exchange-traded funds)
You can also have other types of holdings in your investment portfolio, such as:
- Private equity
- Hedge funds
- Cash
- Property
- Infrastructure assets
If you are new to investing, you can take advantage of diversification by investing in mutual funds. So, let us explore the reasons why you should invest in mutual funds:
- Lower costs
The costs associated with mutual fund investments are lower than those of other investments such as stocks and real estate. However, you can further lower your investment costs by choosing direct plans in place of regular plans. This is because the expense ratios of direct plans are lower by 0.6 to 1% than that of the regular ones. You can also lower your cost by selecting ETFs or other low-cost mutual funds. - Exposure
Mutual fund managers invest in various securities, including stocks, bonds, and liquid funds. They invest in these securities as per the policy document of the mutual fund scheme. You can check the exposure of a mutual fund scheme to different securities. Suppose an MF scheme has invested heavily in blue-chip, large-cap stocks. Such a scheme has exposure to large-cap stocks and carries significant risk. - Diversity
One of the biggest advantages of mutual funds is diversification. It provides stability and growth at the same time. However, the extent of diversification depends upon your age, risk-taking ability, and financial goals. - A person who has retired or is about to retire wants stability in their income. So, the fund manager invests most of the funds in debt instruments and fixed-income securities, ensuring that the principal amount remains secure.
- A young professional in their 20s or 30s will look for growth and wealth accumulation instead of a steady income. In that case, the fund manager invests in stocks that can offer long-term wealth accumulation.
- Middle-aged and married individuals with kids prefer a more balanced fund. The fund manager invests in a more diversified portfolio, including stocks and debt. The weightage of investments in stocks and bonds is usually 50:50, 40:60, or 60:40.
- Choosing funds
You should select mutual fund schemes based on your financial needs and life goals. Suppose you want to create a corpus to give you a steady income during retirement. You have around 25 years to create this corpus. What should you do now? The major factor here is your risk-taking potential. If you have a moderate- to high-risk appetite, you should choose a mutual fund scheme that invests in both blue-chip, large-cap company stocks and debt funds. You should make the right choice because your expected rate of return will depend on your holdings.
Holding ratio for different types of funds
The holding ratio of a fund depends on the number of varying stocks it has in its portfolio. By checking this ratio, you can get an idea of the holdings your fund is investing in. This, in turn, helps you know whether the fund manager is investing as per the stated policy document of the scheme. For instance, let us assume there is a thematic infrastructural mutual fund. It focuses on investing in infrastructure stocks. So, most of its holdings will be in infrastructure-focused stocks.
- Indexed mutual funds
Indexed mutual funds are specialised mutual funds that track stock market indices. These are passive funds and are not actively managed. Instead, the allocation is done in the same weightage as the concerned index that the indexed mutual fund is mimicking. As these are passive funds, a fund manager does not change the allocation of stock or holding to give investors higher returns than the indices. - Active mutual funds
The fund manager of an active mutual fund changes the weightage of investment in a stock if they find that the same is not giving the expected return. They do it to provide you with higher returns than a benchmark index. - Value mutual funds
These are active mutual funds where a fund manager selects stocks or still undervalued holdings. They invest in such stocks to make maximum gains when the growth run of the stock starts. However, these holdings are riskier because they may not provide higher returns in the long run.
What are Mutual Fund Holdings?
The meaning of mutual fund holdings is that they are individual securities in which the fund manager of an AMC (Asset Management Company) has invested. Here, securities refer to stocks, bonds, and money market securities. Depending on a mutual fund scheme’s stated financial goal, the risk tolerance level of intended investors (young professional, retiree, etc.), and fund type, a fund manager invests in a wide range of holdings. The mix of holdings varies from one mutual fund scheme to another.
Understanding mutual fund holdings with an example
A mutual fund pools money from investors to buy different types of securities, such as stocks and bonds. A mutual fund's holdings represent the securities in which the fund has invested. A single fund is formed when all the underlying holdings (purchased by the fund manager) are combined.
When you, as an investor, buy certain units of a mutual fund scheme, you are essentially buying a portion of these holdings (i.e., the securities in which the scheme's fund manager has invested). In India, fund managers make the decision to buy, sell, and hold securities within a fund’s portfolio. They are experienced professionals who are qualified to manage funds on your behalf.
Their goal is:
- To generate ROI (Return on Investments) for investors in line with the fund’s investment mandate.
- To manage risk on behalf of the investors.
Most mutual funds invest in various holdings to diversify. They do this to spread the risk of investment and provide investors with returns based on the performance of the underlying assets.
- Examples
Let us assume a mutual fund named XYZ 50 Index Fund, which has invested in stocks in exact proportions by mirroring the composition in a benchmark index, say, the NIFTY 50 index. In the Indian stock market, NIFTY 50 is a benchmark index that is the weighted average of the fifty largest Indian companies, all of whom are listed on the NSE.
All these 50 stocks in which the XYZ 50 Index Fund has invested are the holdings the fund manager has invested in on your behalf.
Types of mutual fund holdings in India
In India, the fund manager of a mutual fund scheme can invest in various securities to offer your portfolio the benefits of diversification. They can invest in:
- High-risk, high-return stocks
- Comparatively less risky and low-return securities such as bonds or money market instruments
These securities are the holdings. There can be different kinds of holdings in which a fund manager can invest. The most common examples are given below:
- Equity holdings
Equity holdings are mutual fund schemes that invest in stocks of companies listed on stock exchanges (such as the NSE or BSE).
Example
Suppose there is a large-cap equity mutual fund. It holds stocks of companies with a market capitalisation of Rs. 20,000 crore or more.
If your mutual fund scheme has invested in these large-cap stocks, it has invested in equity holdings that are categorised as large-cap.
- Debt holdings
Mutual funds invest in many fixed-income securities, such as:- Government bonds
- Debentures
- Corporate bonds
Example
A debt mutual fund may invest in various kinds of bonds. For example, your debt fund can invest in a 10-year Treasury Bond, which is categorised as bonds that are issued by the Government of India.
- Money market holdings
Mutual funds invest in money market instruments as well. Some of the most popular ones are:- Certificates of Deposit (CD)
- Commercial Papers
- Treasury Bills
The mutual funds that invest in money market instruments are called liquid funds in India.
An example is a liquid fund that has invested in treasury bills. The Reserve Bank of India (RBI) issues these bills in India.
Suppose your fund manager has invested in an RBI-issued treasury bill. In that case, they invest in money market holdings to lower your investment risk and provide consistent returns.
Individuals invest in liquid funds to get the benefits of liquidity, consistent returns similar to fixed deposits, and face the least risk of losing principal investment.
- Hybrid holdings
This refers to mutual fund schemes that invest in stocks and debt instruments such as bonds and money market securities. The mix in which the fund manager invests in hybrid holdings depends on the investors' risk tolerance level and the expected returns.
Example
Suppose you are investing in a balanced fund. Such a fund invests in both equity and debt holdings. While equity holdings can include stocks, debt holdings can include bonds and money market instruments.
- If the target investors of that balanced fund are young professionals in their 20s or 30s with a high appetite for risk, the fund manager can invest 80% of the funds in equity holdings and 20% in debt holdings.
- Suppose the target investors of the balanced fund are retirees in their 50s or 60s (who have the least risk appetite and want a regular income from their investment). In that case, the fund manager can invest 20% of the funds in equity and 80% in debt.
How do mutual fund holdings work?
A mutual fund can invest in a wide array of holdings, including equity, debt, fixed-return assets, Certificates of Deposits (CDs), and other financial instruments.
In India, the process starts with the launch of an NFO (New Fund Offer), which is similar to an IPO (Initial Public Offer) launch for company stocks. Investors then invest, thereby leading to the pooling of funds. The investors buy units of the mutual fund scheme they want to invest in, similar to buying shares of a company.
When a certain amount of money is pooled, the fund manager overseeing the fund starts making investment decisions based on the broad objectives and strategies mentioned in the policy document. However, actual investment decisions will depend upon the prevailing market conditions.
A fund manager usually resorts to diversification to provide you with stability and growth. Fund managers invest in various securities, including stocks, debt instruments, liquid funds, and other financial vehicles.
Depending on the investments in different securities (which are the holdings of mutual funds), mutual funds can be categorised as equity funds, debt funds, hybrid funds, and liquid funds.
- In the case of equity funds, most of the holdings are in stocks.
- When the fund type is debt funds, most holding types are bonds or other fixed-income instruments.
- A hybrid fund is also known as a balanced fund. In such funds, a fund manager invests in both equity and debt instruments. So, in a hybrid fund, the holdings are both equity and debt funds.
In liquid funds, most of the holdings include short-term debt securities.
You can invest in any or all of these funds in lumpsum or the SIP (Systematic Investment Plan) investment strategy. While lumpsum investment entails a one-time investment, SIP requires you to invest a fixed amount monthly, quarterly, half-yearly, or annually.
Once you invest, you can expect returns during a specified period. Return on your investment depends upon the performance of the holdings (stocks, debt, etc.) in which your mutual fund scheme’s fund manager has invested. Usually, there is an exit load that you have to pay if you want to redeem.
It is important to know that mutual funds are subjected to market risks, no matter whether they invest in stocks, debt, liquid funds, or all of them because they are market-linked products.
Key takeaways
- Holdings are the various investments owned within a portfolio, encompassing stocks, bonds, mutual funds, real estate, and other securities. They are strategically chosen to meet financial goals, risk tolerance, and investment horizon.
- Diversification of holdings helps mitigate risk and enhance potential returns. Mutual funds offer an easy way to diversify by investing in a mix of stocks, bonds, and other securities, providing stability and growth.
- Individual portfolios can include equities, bonds, mutual funds, options, derivatives, ETFs, private equity, hedge funds, cash, property, and infrastructure assets, reflecting varied investment strategies.
- Mutual funds pool investor money to buy various securities, with fund managers making decisions to achieve ROI and manage risk. Mutual funds can be equity, debt, hybrid, or liquid funds based on their holdings.
- Selecting mutual funds should align with financial goals and risk tolerance. Direct mutual fund plans have lower expense ratios, reducing costs. Indexed funds passively track market indices, while active funds aim to outperform benchmarks.
Final words
By investing in a diversified portfolio of holdings, fund managers aim to provide investors with potential returns and, at the same time, manage risk effectively. Fund managers use various investment strategies to provide adequate diversification and manage investment risk. Some of the most popular ones include diversification based on assets, sector, market cap, credit quality, time frame of investment, and geography.
So, the next time you compare mutual funds, it is important that you explore the holdings of the mutual fund schemes. You may decide to invest in two mutual funds from different fund houses to diversify your risk. However, you may invest in two mutual funds with a similar holding pattern. So, be careful while investing.
If you are new to the world of investments, visit the Bajaj Finserv Mutual Fund Platform, which provides you with 1000+ mutual funds. You can compare various mutual fund schemes, use the SIP calculator or lumpsum calculator, and invest in a scheme that aligns with your investment goals.
