HDFC MF Weekend Bytes

(A weekly series from HDFC Mutual Fund)

Key Tenets to
Reduce Risks While
Investing in Equities
 Equities are an important asset class in the
journey of wealth creation as they have the
potential of providing growth in the long term.
But the investors are often too mindful of the
risks involved and either underinvest in the
asset class or totally stay away from it.

While how much to invest in equities is beyond

the purview of this article, we explore in detail
six tenets (over the next six weeks) that one can
follow in order to reduce risks while investing
in equities. This week we take up the first tenet
that an investor should keep in mind -

Tenet 1: Diversification
Diversification within Equities
While it is prudent to diversify across different asset
classes, herein we discuss the benefits and approaches to
diversifying within equities.

Let’s take an example of 2 Investors –

Investor A and Investor B investing in equity:

Investor A Investor B

Invests in a Invests in a
Question diversified equity
single stock
mutual fund

What could be A could see a The worst returns

the maximum loss complete loss of for an investor
in a pessimistic his or her with a 3 year
market scenario? investment – for horizon in NIFTY
example, if the 50 Index since its
company goes inception in 1994
bankrupt would have been
-16.38%
 NIFTY 50 - 3 year Rolling Returns

70%

60%

50%

40%

30%

20%

10%

0%

-10%

-20%
-16.38%
-30%
Jul-11

Jul-17

Jul-19
Jul-13
Jul-14
Jan-11

Jul-12

Jul-15

Jul-21
Jul-16

Jul-18
Jul-97

Jul-01

Jul-10
Jul-99
Jul-93
Jul-94

Jan-17

Jan-19
Jul-95
Jul-96

Jan-13
Jul-98

Jan-14
Jul-07

Jan-12

Jan-21

Jul-22
Jul-09

Jan-15
Jan-16
Jul-03

Jan-18
Jul-04
Jan-97

Jan-01

Jul-02

Jan-10
Jul-05

Jul-20
Jul-06
Jan-99

Jul-08
Jan-94

Jul-00
Jan-95
Jan-96

Jan-23
Jan-98

Jan-07

Jan-22
Jan-09
Jan-03
Jan-04
Jan-02

Jan-05

Jan-20
Jan-06

Jan-08
Jan-00

Source: MFI Explorer

Many equity investors tend to buy stocks based on tips /

recommendation from friends / experts and are likely to
lack discipline when it comes to diversification. Too much
focus on individual stocks and a lack of ‘portfolio’ approach
can lead to unhealthy concentration into a very few stocks
/ sectors. Adopting a ‘portfolio’ approach to equity
investing can significantly reduce company specific risks
and is likely to result in a better investment experience.
How to
diversify
within
equities?
A few boxes to check:

Market cap diversification across large,

mid and small cap segments

Sector diversification

Style diversification (Value / Growth)

Solution
A set of few diversified equity oriented
funds across categories would do.
 Different market cap segment
outperform each other at
different times, a case for market
cap diversification
FY Returns Nifty 100 TRI Nifty Midcap 150 TRI Nifty Smallcap 250 TRI
Mar -21 71.2 101.6 118.7
Mar -20 -24.7 -29.9 -39.9
Mar -19 13.9 -0.6 -12.4
Mar -18 12.3 16.8 13.0
Mar -17 22.6 37.2 40.6
Mar -16 -6.9 -1.7 -5.9
Mar -15 30.8 59.7 62.8
Mar -14 19.8 17.9 22.7
Mar -13 8.8 4.5 -5.3
Mar -12 -7.8 -4.6 -8.6
Mar -11 11.4 4.7 0.9
Mar -10 84.9 135.8 141.4
Mar -09 -36.6 -48.5 -54.9
Mar -08 23.7 21.4 31.1
Mar -07 13.6 -1.1 11.9
Mar -06 67.7 75.0 78.9
Source: MFI Explorer

Rank 1 Rank 2 Rank 3

Large cap 6 3 7

Mid cap 3 10 3

Small cap 7 3 6
 Different sectors outperform each
other at different times, a case
for sector diversification
Period NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY
Auto TRI Energy Financial FMCG TRI Infrastructure IT TRI Media TRI Pharma Private
TRI Services TRI TRI TRI Bank TRI
FY2008 -3.6% 46.7% 34.6% 26.1% 38.1% -28.1% 1.0% 8.4% 28.3%
FY2009 -27.1% -23.0% -41.4% -10.1% -43.9% -36.9% -59.7% -23.8% -46.3%
FY2010 141.7% 40.7% 127.4% 44.4% 45.6% 153.9% 124.6% 84.2% 167.1%
FY2011 22.8% 6.3% 24.7% 28.7% -9.5% 24.1% -13.4% 14.2% 25.0%
FY2012 11.1% -19.4% -9.6% 26.2% -17.7% -7.7% -12.7% 11.9% -1.4%
FY2013 1.9% 1.4% 15.9% 36.3% -11.0% 12.8% 33.9% 19.1% 21.2%
FY2014 38.7% 12.0% 12.9% 19.1% 20.0% 30.4% 15.1% 28.8% 17.4%
FY2015 50.0% 1.0% 44.6% 11.2% 26.0% 32.5% 23.1% 69.4% 54.5%
FY2016 -5.3% 3.6% -11.9% 0.5% -20.7% -4.8% 6.9% -14.0% -7.4%
FY2017 22.9% 41.6% 34.3% 21.2% 23.3% -3.4% 37.5% -4.9% 31.2%
FY2018 10.6% 15.8% 18.0% 12.7% 9.1% 19.3% 4.1% -19.4% 16.9%
FY2019 -22.1% 27.2% 23.6% 17.7% -1.6% 27.4% -23.4% 12.4% 27.0%
FY2020 -41.6% -30.5% -25.1% -8.6% -24.7% -16.0% -57.1% -22.1% -40.6%
FY2021 109.8% 68.2% 69.1% 30.1% 76.1% 105.8% 48.9% 71.9% 74.6%
FY2022 8.2% 46.3% 9.7% 6.2% 24.7% 43.0% 55.4% 11.4% 4.0%
FY2023FYTD 20.7% 1.0% 11.6% 23.6% 5.5% -19.7% -15.9% -6.8% 19.5%

Period NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY
Auto TRI Energy Financial FMCG TRI Infrastructure IT TRI Media TRI Pharma Private
TRI Services TRI TRI TRI Bank TRI
FY2008 8 1 3 5 2 9 7 6 4
FY2009 4 2 6 1 7 5 9 3 8
FY2010 3 9 4 8 7 2 5 6 1
FY2011 5 7 3 1 8 4 9 6 2
FY2012 3 9 6 1 8 5 7 2 4
FY2013 7 8 5 1 9 6 2 4 3
FY2014 1 9 8 5 4 2 7 3 6
FY2015 3 9 4 8 6 5 7 1 2
FY2016 5 2 7 3 9 4 1 8 6
FY2017 6 1 3 7 5 8 2 9 4
FY2018 6 4 2 5 7 1 8 9 3
FY2019 8 2 4 5 7 1 9 6 3
FY2020 8 6 5 1 4 2 9 3 7
FY2021 1 7 6 9 3 2 8 5 4
FY2022 7 2 6 8 4 3 1 5 9
FY2023FYTD 2 6 4 1 5 9 8 7 3

Source: MFI Explorer

31st March 2022 to 31st December 2022
 Conclusion
Despite the risk and volatility in the
short term, over the long term, equity
as an asset class has outperformed
others. It has also beaten inflation by
the highest margin. Hence, it is
pertinent to participate in equities while
taking steps to reduce the risks. Five
more editions as part of this series to
follow. Hope this makes for an
interesting and useful read.

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