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nism-series-va-concentration-risk-hierarchy-equity-funds[ MUTUAL FUND DISTRIBUTORS ]

Ranking equity funds by portfolio concentration risk (from lowest concentration risk to highest concentration risk), which sequence is correct?

[ A ]Diversified Funds (e.g., Multi Cap/Flexi Cap) -> Focused Funds (max 30 stocks) -> Thematic Funds -> Sector Funds[ CORRECT ]

[ B ]Sector Funds -> Thematic Funds -> Focused Funds -> Diversified Funds

[ C ]Focused Funds -> Diversified Funds -> Sector Funds -> Thematic Funds

[ D ]Sector Funds -> Diversified Funds -> Thematic Funds -> Focused Funds

Takeaway

Option A is correct: Diversified Funds (e.g., Multi Cap/Flexi Cap) -> Focused Funds (max 30 stocks) -> Thematic Funds -> Sector Funds

Derivation

Concentration risk increases as portfolio breadth narrows: (1) Diversified funds (Multi Cap, Flexi Cap) invest across 50-100+ stocks across all economic sectors, minimizing concentration risk. (2) Focused funds invest in maximum 30 stocks, increasing stock-specific exposure. (3) Thematic funds invest across multiple related industries tied to a single theme (e.g., Infrastructure). (4) Sector funds invest >=80% in a single narrow sector (e.g., Banking or Pharma), carrying the highest concentration and cyclical underperformance risk. This tests portfolio concentration dynamics. The common error is inverting the concentration hierarchy.

Why the others fail

B — Sector Funds -> Thematic Funds -> Focused Funds -> Diversified Funds

This sequence shows decreasing concentration risk, starting with the most concentrated single-sector funds.

C — Focused Funds -> Diversified Funds -> Sector Funds -> Thematic Funds

Focused funds (30 stocks) have higher stock concentration than broad diversified funds (70-100 stocks).

D — Sector Funds -> Diversified Funds -> Thematic Funds -> Focused Funds

Sector funds are the most concentrated equity category, making their placement at the beginning of an increasing risk list incorrect.