Has number of stocks in a mutual fund portfolio any co relation with returns

At the outset, I thank you for sending us an interesting query.

Please note the following n this context -

We have not yet analysed if fund managers reduce the number of stocks as the fund grow in age. However, with great degree of certainty, we can tell you that it is not the case. The number of stocks in a fund has nothing to do with the age of the fund or the returns. For example - a fund can generate 20% annual returns with 10 stocks or may not generate even 10% return with 20 stocks!

The most important aspect, therefore is, selection of quality or right stocks (as per the fund mandate) which can generate the desired returns for the investors in the long term. Again, fund managers keep reshuffling the portfolio based on their investments style, the call that they take against each stock, market movements and scheme objectives etc. We invest in mutual funds as our investments are in expert hands. i.e. the fund manager and therefore, we should not worry about what and how many stocks he or she is holding and why.

Coming back to your query with regards to returns, you are finding the returns in the last one year as high but in the last 10 years or 5 years as low. Please note that this is because in the last one year, the stock markets have given very good returns but in the last 3 years the stock market was partially in bear phase. Again in the last 10 years the markets went through maybe 3 bear phases and 2 bull runs (including the one that we are witnessing now).

When you see returns in mutual fund research websites, mostly they show 'trailing returns'. Trailing returns are nothing but average of annual returns generated by the scheme during the various time periods. For example - Scheme A has generated 20%, 12%, 15%, 8%, 2%, 11%, 13%, 7%, 9% and 8% returns respectively in the last 1,2,3,4,5,,6,7,8,9 and 10 years period. Therefore, the trailing return of 3 years would be 15.66% (20% +12% + 15% / 3). As you can see, in the last 1 year even though the scheme return is 20% but 3 year trailing return is only 15.66%.

Similarly, the trailing return of 5 years would be 11.4% (20% + 12% + 15% + 8% + 2% / 5) and the returns for 10 years would be 10.5% (20% + 12% + 15% + 8% + 2% + 11% + 13% + 7% + 9% + 8% / 10).

Please also note that when you see returns in a mutual fund research websites, the period of 1 year, 3 year or 5 years etc. means that these periods are dated back from today. For example if you see the 1 year return today, it means the return is for the period 2/8/2016 to 1/8/2017. Similarly, 3 years return is for the period 2/8/2014 to 1/8/2017 and so on. Simply speaking, the day you see the returns (if the NAV is updated), the period is calculated from that date to the last 1,3 or 5 years as the case may be.

However, if you also want to see annual returns, then these websites provide you year wise returns too - For example, returns generated in the calendar year 2016, 2015, 2014 or 2013 and so on.

We tried explaining and clearing your doubts. Hope, we could make you understand the points that you had in your mind about mutual funds.

Thanks again.