The Illusion of Diversification: How to Build a Truly Resilient Mutual Fund Portfolio
The Illusion of Diversification: How to Build a Truly Resilient Mutual Fund Portfolio
"Don't put all your eggs in one basket” - every investor has heard this advice. For mutual fund investors, this often translates to holding a large number of schemes, believing that a portfolio with ten or more funds is automatically well-diversified. But what if this is a costly illusion?
Simply accumulating multiple funds doesn't guarantee true diversification. In many cases, it can lead to portfolio overlap, where different funds hold many of the same underlying stocks, leading to a concentrated portfolio rather than a diversified one. This can amplify risk and make your portfolio more vulnerable to market downturns. So, how can you build a genuinely resilient portfolio that protects you from the illusion of diversification?
A truly diversified mutual fund portfolio balances different asset classes, investment categories, and styles so that when one part underperforms, another cushions the impact.
The most critical decision you will make is how to allocate your capital. Your portfolio should be a strategic blend of assets that have low or negative correlation with each other. A good portfolio should have exposure to:
Growth-oriented, higher risk, suitable for long-term needs.
Provides stability, regular income, and reduces volatility.
Acts as a hedge during inflation or market uncertainty.
Exposure to global markets helps reduce dependence on the domestic market. Adding international funds provides exposure to different economies, currencies, and corporate cycles, which can act as a powerful diversifier.
By mixing asset classes, you ensure that not all investments move in the same direction at the same time. Your final asset allocation should be a function of your financial needs and risk tolerance.
Even within equities, funds can be chosen to balance stability and growth:
Invest in blue-chip companies; stable and less volatile.
Higher growth potential but more volatile.
Target specific themes (IT, Pharma, Banking); higher risk but can boost returns if timed right.
Mix of equity & debt for balanced growth.
Investment styles represent different philosophies of Investing. Mixing styles brings balance to the portfolio:
Focuses on companies with high earnings potential (e.g., tech firms).
Looks for undervalued companies trading below intrinsic worth.
A mix of growth and value, balancing stability with opportunities.
Mutual funds also differ in the strategy they follow to construct portfolios:
  • The Goal: Active funds aim to generate "alpha," or returns that outperform a market benchmark. This is achieved through a fund manager's research and stock-picking expertise.
  • The Challenge: There is a risk that the fund manager might underperform the index. Many active funds, especially in the large-cap space, might end up with a high overlap with the benchmark, negating their "active" nature.
  • The Goal: Passive funds (Index Funds and ETFs) are designed to simply replicate the performance of a market index. The objective is to capture the market's "beta" (or market returns) at the lowest possible cost.
  • The Challenge: A portfolio of only passive funds is still concentrated in the underlying index. If the Nifty 50 is heavily weighted in financial services, so will be your passive portfolio.
  • The Goal: This approach sits between active and passive. These funds use algorithms and data models to eliminate human bias in selection.
  • Rule-based funds add a new dimension of diversification based on factors rather than just market cap. For example:
    • Value Funds: Invest in companies deemed undervalued.
    • Momentum Funds: Invest in stocks with recent strong performance.
    • Quality Funds: Select companies based on strong fundamentals.
These funds can capture unique return streams and reduce correlation with traditional market-cap-weighted indices.
Once you've chosen your funds based on the above layers, it's time to validate your strategy.
Holding too many funds often leads to owning the same stocks multiple times, reducing the benefit of diversification. Use portfolio overlap tools to ensure your schemes complement each other rather than mirror each other.
A small, focused portfolio is easier to track and manage. Beyond 6-7 funds, returns often get diluted, and monitoring performance becomes unnecessarily complicated.
Spreading across asset classes ensures your portfolio doesn't rely on just one market. While equity drives long-term growth, debt provides safety, and gold or international funds act as hedges during uncertainty.
Combine different investing styles (growth + value) and strategies (active + passive/quant). This reduces the risk of one approach underperforming for a long period.
Portfolios must evolve with time. An annual review helps weed out duplication and realign investments with your financial needs and risk profile.
True diversification is not about having "many funds,” but about having the right mix. By spreading across asset classes, categories, styles, and strategies, investors can create a portfolio that is resilient, manageable, and need-based.

Because in investing, smart diversification protects wealth - blind diversification only complicates it.
NJ E-wealth
Quant Funds: Investing with the Power of Data & Algorithms
Quant Funds: Investing with the Power of Data & Algorithms
The world of investing is changing rapidly, and at the heart of this transformation lies Quant Funds - a new-age approach where mathematics, data, and algorithms take the driver's seat. Unlike traditional funds that rely heavily on human judgment, Quant Funds use sophisticated models to analyze vast amounts of financial data and identify patterns invisible to the human eye. The goal is to make consistent, calculated investment decisions by mitigating the influence of human biases and emotions.
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  • Transparency & Discipline - Decisions are based on rules, not gut feelings.
  • Eliminating Bias - Human emotions often cloud judgment; algorithms don't.
  • Accessibility - Growing computing power and data availability have made quant strategies mainstream.
  • Consistency - Quant models aim for steady performance across market cycles.
Quant funds build their portfolios by employing a factor investing strategy. This means they select securities based on specific, return-driving characteristics, or "factors," such as:
  • Value: Targeting stocks priced lower than their intrinsic value, using metrics like the price-to-earnings (P/E) ratio.
  • Momentum: Capitalizing on the trend of stocks that have recently outperformed, based on the observation that strong past performance often continues in the short to medium term.
  • Quality: Focusing on companies with strong financial fundamentals, such as high profitability and low debt levels.
  • Size: Recognizing the historical tendency for smaller companies to outperform larger ones over the long term.
  • Low Volatility: Selecting stocks with lower price fluctuations to provide stable returns and reduce risk.
The models used by quant funds are rigorously back-tested against historical market conditions to ensure their robustness. A fund may use a single factor or combine multiple factors to build a diversified portfolio.
  • Single-Factor Funds - These funds focus on one particular factor when choosing stocks. A Value Factor Fund may only pick stocks that look undervalued If that one factor does well, the fund performs strongly. But if the factor struggles, returns may be weak.
  • Multi-Factor Funds - Instead of relying on one factor, these funds combine two or more factors (like value + momentum, or quality + low volatility). A fund might buy only those companies that are both undervalued (value) and have low debt (quality). This helps balance risks - if one factor underperforms, another may support the portfolio.
  • Quantamental Funds - These funds combine the power of algorithms with human insights. The computer screens thousands of stocks using rules, but the fund manager may apply judgment before final selection.
  • Market-Neutral / Arbitrage Quant Funds - Use algorithms to simultaneously take long and short positions, aiming to profit from price inefficiencies with minimal overall market exposure.
  • Active Smart Beta Funds - Active Smart Beta strategies uniquely blend the rigorous discipline of rule-based investing with the adaptable nature of active management. While these funds utilize a systematic, factor-based approach, a crucial differentiator is the fund manager's discretion in defining the rules governing portfolio construction. This inherent flexibility in tailoring and evolving these rules provides Active Smart Beta funds with enhanced potential to outperform traditional factor indices over time.
  • Passive Smart Beta Funds - These are index-linked quant strategies (often via ETFs or index funds) that may use alternative weighting - based on factors like value, low volatility, or momentum - instead of market cap.
Quant Funds open new doors for investors who want to:
  • Minimize bias in decision-making
  • Gain exposure to disciplined factor-based investing
  • Access strategies once limited to global hedge funds
  • Build portfolios that are adaptive, data-driven, and future-ready
In short, Quant Funds are not just a passing trend. They represent the future of investing, where human intuition and machine intelligence come together to create smarter, more resilient portfolios.
NJ E-wealth
5 Must-Have Insurance Policies in Your Financial Portfolio
5 Must-Have Insurance Policies in Your Financial Portfolio
When it comes to building a strong financial portfolio, most people focus on savings, investments, and growing our wealth. While these are important, one crucial aspect often overlooked is protection. Life has a way of surprising us, and not always in good ways. No matter how well you plan your finances, an unforeseen event such as a health crisis, accident, or damage to your car or home can derail your financial goals. That's where insurance steps in-not as an expense, but as a shield that safeguards your wealth and secures your family's future.
Here are five must-have insurance policies that every individual should consider including in their financial portfolio.
If you are the main income earner (breadwinner) of your family -meaning if your family depends on your income, then term life insurance is a must. It provides pure life cover-meaning in case of your untimely demise, your family receives a lump sum amount (or regular income or both) to meet expenses, pay off liabilities, and continue their lifestyle. You pay a premium for a specific "term" (e.g., 20 or 30 years), and if you pass away during that period, the insurance company pays the claim. Without it, your family would be left to navigate a difficult emotional loss while also facing a financial crisis.

Why it's essential:
  • Provides financial security to your dependents in your absence.
  • Affordable premiums for high coverage.
  • Helps cover long-term goals like children's education or marriage.
Always choose a life cover amount that takes care of all your liabilities, future goals & income replacement in your absence.
Medical expenses are rising at an alarming rate. Even a few days in the hospital can cost lakhs of rupees. Health insurance ensures that you don't have to dip into your savings to pay huge hospitalisation bills. A comprehensive health insurance policy acts as a shield, covering expenses like hospitalization, doctor's fees, surgeries, and medicine.

Don't assume your employer-provided health insurance is enough; it may not be sufficient or have limitations like co-pay, cappings, etc; and is tied to your job. Having a personal policy ensures uninterrupted coverage, regardless of your employment status.

Why it's essential:
  • Covers hospitalization, surgeries, and treatment costs.
  • Prevents financial setbacks during medical emergencies.
  • Access to quality healthcare
  • Cashless benefit
Don't just look at the premium-get adequate coverage, exclusions, network hospitals and consult your insurance sales person.
Caring for aging parents is a financial and emotional responsibility. As your parents age, their medical needs may increase, and so does the cost of healthcare. People make the mistake of including their parents in a standard family floater plan, which might not offer adequate coverage for age-related ailments and could significantly increase the premium for the entire family.

Having a separate health insurance policy for your parents is crucial. By securing this policy, you're not only protecting them but also preventing a financial drain on your own savings.

Why it's essential:
  • Covers age-related illnesses and frequent medical needs.
  • Helps avoid large out-of-pocket expenses for their treatment. Reduces the financial burden on you when your parents need treatment.
  • Gives peace of mind knowing their healthcare is secured.
Buy these policies while your parents are younger and relatively healthier. The earlier you buy, the fewer exclusions and the lower the premiums. By purchasing a policy early, when you are less likely to fall ill, you can serve the waiting periods without any urgency or financial stress.
While life & health insurance cover death and medical treatment, there remains a gap for accidental disability. Accidents can happen anytime, anywhere-at work, on the road, or at home. If an accident leads to a temporary or permanent disability, you could be unable to work, resulting in a loss of income. A personal accident policy provides financial support in such cases.

A PA policy provides a lump sum amount in the event of accidental death, total permanent disability, or partial permanent disability. Some plans even offer a weekly payout for a period of temporary total disability, which can help cover your daily expenses while you're recovering.

It's a critical safety net that ensures your financial life doesn't come to a halt just because an unexpected event has rendered you unable to earn.

Why it's essential:
  • Covers both death and disability due to accidents.
  • Provides compensation for income loss during recovery.
  • Affordable premiums compared to the coverage offered.
Ensure your policy covers partial and total disabilities, along with income replacement benefits.
For many of us, vehicles (car / bikes) and property (home / shop) are the biggest assets after investments. Accidents, theft, natural disasters, or fire can cause significant financial losses if you're not covered.

These policies ensure that you don't have to bear the entire cost of repairs or replacement out of pocket, a financial blow that could easily derail your long-term goals.

Why it's essential:
  • Vehicle insurance is mandatory by law, but comprehensive coverage goes beyond third-party liability to cover your own damages.
  • Property insurance protects your home or office from risks like fire, earthquake, theft, or floods.
  • Provides financial security against unforeseen damages to valuable assets.
Tip: Always opt for comprehensive policies that cover both natural and man-made calamities.

The Role of a Good Insurance Advisor

While understanding these policies is important, choosing the right coverage is where most people struggle. This is where a good insurance advisor or sales person (BQP/POSP) becomes invaluable.

Why you need one:
  • Helps you assess risks based on your life stage, income, and responsibilities.
  • Suggests the right coverage amount instead of simply selling a product.
  • Keeps you updated on new policies, features, and changes in regulations.
  • Guides you during claims-ensuring smooth processing without stress.
Unfortunately, many people buy insurance randomly. The result? Under-insured or misaligned policies that fail during emergencies. A trustworthy advisor ensures your insurance portfolio is both adequate, efficient and the one that really protects you.

Sample Premiums
INSURANCE COVERAGES ANNUALLY MONTHLY*
Term Life - 1 Crore (Individual, Age - 35) 15,000 1,300
Health - 5 Lakhs (Family, Age 35 2A+2C) 25,000 2,100
Health - 5 Lakhs (Parents, Age 62, 2A) 55,000 4,583
Personal Accident - 50 Lacs (Family, Age 35, 2A+2C) 17,000 1,417
Pvt. Car - 15 Lakhs (Comprehensive) 15,000 1,300
Home - 50 Lakhs (Building + Contents) 1500 125
Approximate Premium Rs.1,28,500/- Rs.10,708/-
Insurance is not an expense, it's investing into your future, it's about financial preparedness. By including term life, health insurance (for yourself and your parents), personal accident, and vehicle/property insurance in your financial portfolio, you are setting up a strong safety net for yourself and your loved ones. Pair this with the guidance of a knowledgeable insurance advisor, and you can rest assured that no unexpected event will derail your financial journey.

Your financial plan is only as strong as the protection around it. So, review your portfolio today. Do you have all five? If not, maybe it's time to call your insurance advisor and get that safety net in place.
Perceived Quality in Investing: Understanding the Perception-Reality Gap
Perceived Quality in Investing: Understanding the Perception-Reality Gap
A company is growing rapidly. Profits are rising. Stock price doubling. Is it a quality company? Maybe yes. But maybe not.
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Perceived quality refers to the impression that a company is fundamentally strong, based on surface-level traits rather than its actual financials and operational health. It's the kind of quality that's assumed, not proven.

This perception often builds around factors like strong brand visibility, rapid earnings or revenue growth, frequent media attention, and high stock valuations. While these factors can signal success, they may mask weak balance sheets, inconsistent cash flows, or poor governance.

When market conditions turn, such gaps are exposed, and the cost of mistaking perception for quality can be significant.
Decades ago, profitability was seen as the hallmark of quality. But as markets matured, so did the definition. Today, quality is seen as a multi-dimensional concept. It goes beyond just how much a company earns, and looks deeper into how it earns, how sustainably it grows, and how transparently it operates.

This evolution can be broadly understood in three phases:
  • Profitability-centric quality: Early definitions focused mainly on metrics like Return on Equity (RoE) and profit margins. High profits were equated with quality.
  • Financial strength and stability: As more data became available and investors experienced market cycles, factors like low leverage, consistent earnings, and healthy cash flows gained importance.
  • Governance, capital allocation, and sustainability: In today's investing landscape, quality also includes softer yet critical aspects like management integrity, capital discipline, and governance practices.
The chart below shows how the market's understanding of quality has matured over the years.
defination of quality
Source: Vontobel. For illustration purposes only.
Over time, the definition of quality has become more layered. It's no longer just about profitability or growth. What sets a truly high-quality company apart is a combination of:
  • High and consistent profitability
  • Low leverage and strong balance sheets
  • Stable earnings and healthy dividends
  • Clean accounting and sound governance
When quality is defined using a single parameter, like profitability or low leverage, it may miss out on other crucial aspects of business strength. But when all key quality parameters are combined in a cohesive model, like the NJ Quality+ Model, the results speak for themselves.
True Quality is Multi-dimensional
Source: CMIE, Internal research. The period for calculation is 30th September 2006 to 30th June 2025. Past performance may or may not be sustained in future and is not an indication of future return. NJ Quality+ Model is a proprietary methodology developed by NJ Asset Management Private Limited. The methodology will keep evolving with new insight based on the ongoing research and will be updated accordingly from time to time.
From Sep 2006 to Jun 2025 CAGR (%) Annualised Volatility (%) Maximum Drawdown (%) 5-Year Rolling Mean Return 10-Year Rolling Mean Return
NJ Quality + 19.92 16.87 -59.05 20.04 19.78
ROE Top 100 15.51 17.44 -63.94 15.92 15.96
Low Debt to Equity 100 17.75 16.98 -60.49 18.16 17.99
ROE Consistency Top 100 17.14 17.74 -57.90 16.23 15.95
Dividend Payout Top 100 17.87 17.23 -60.31 17.71 17.61
Nifty 500 TRI 12.92 20.10 -63.71 12.51 12.59
Source: CMIE, Internal research. The period for calculation is 30th September 2006 to 30th June 2025. Past performance may or may not be sustained in future and is not an indication of future return. NJ Quality+ Model is a proprietary methodology developed by NJ Asset Management Private Limited. The methodology will keep evolving with new insight based on the ongoing research and will be updated accordingly from time to time.
The data shows that the NJ Quality+ model not only delivers superior long-term returns but also demonstrates lower volatility and more consistent 5-year and 10-year rolling returns than individual quality parameters, which are hallmarks of genuine quality investing.
The idea that quality protects during downturns and compounds steadily over time is not just theory; it's backed by data and research.

Some studies on the Indian equity market have revealed that the differentiation between strong and weak fundamentals plays a critical role in generating returns. In particular, a study* examining the "Quality Minus Junk” (QMJ) strategy found that a substantial portion of the strategy's returns stemmed from shorting poor-quality stocks, highlighting how the ability to identify and avoid low-quality stocks can significantly enhance portfolio performance.

These findings are well-reflected in the chart below. The NJ Quality+ portfolio has outperformed both the low-quality model and the broader Nifty 500 TRI across all time frames, not just in returns, but also in terms of volatility.

NJ Quality
Source: Internal research, CMIE, NSE. Average of daily rolling returns calculated for the different holding periods. The period for calculation is 30th September 2006 to 30th June 2025. Past performance may or may not be sustained in future and is not an indication of future return. NJ Quality+ Model and Low Quality Model are proprietary methodologies developed by NJ Asset Management Private Limited. The methodology will keep evolving with new insight based on the ongoing research and will be updated accordingly from time to time.
From Sep 2006 to Jun 2025 Cumulative Growth of Rs.1000 Annualised Volatility (%) 5 Yr Period Loss Probability (%)
NJ Quality+ Rs.30,186 16.87 0.00
Low Quality Model Rs.5,486 22.91 17.27
Nifty 500 TRI Rs.9,778 20.10 1.18
Source: Internal research, CMIE, NSE. The period for calculation is 30th September 2006 to 30th June 2025. Past performance may or may not be sustained in future and is not an indication of future return. NJ Quality+ Model and Low Quality Model are proprietary methodologies developed by NJ Asset Management Private Limited. The methodology will keep evolving with new insight based on the ongoing research and will be updated accordingly from time to time.
Mistaking perception for quality can turn out to be costly and lead to various risks:
  • Capital erosion when the story fades
  • Poor risk-adjusted returns
  • Volatility due to unstable fundamentals
  • Poor downside protection
What seemed like a "safe bet” may lead to steep drawdowns, especially during market corrections.
Recognising true quality requires looking beyond the surface. Here are a few things to keep in mind throughout the market phases:
  • Don't chase only recent EPS growth
  • Look at balance sheet quality, RoCE, and cash flows
  • Beware of promoter pledging, auditor resignations, and governance red flags
  • Favour companies with transparency, consistency, and prudent capital allocation
  • Use quality-focused mutual funds or rule-based strategies to filter out noise
A rule-based approach helps avoid biases and perceptions about companies by evaluating them objectively, based on fundamentals. It cuts through market noise, helping reduce the risk of costly mistakes.

Why does this matter today? In bull markets, perception dominates. But over time, only true quality sustains. The Indian market has seen many "growth darlings” fall, highlighting the need to evolve from growth-chasing to quality-seeking.
The real risk is not market volatility, but owning the wrong business. Perceived quality may perform in the short term. But when markets test resilience, only true quality stands firm. Identifying quality businesses early and staying invested through a structured approach can help avoid costly mistakes and improve long-term outcomes.

At NJ Mutual Fund, a 100% rule-based and quality-focused approach forms the foundation of our investment process. This strong and consistent focus on quality helps us build portfolios that are resilient across market cycles and aligned with long-term financial goals.
1) What is the quality factor in investing?
The quality factor refers to investing in companies with strong and sound financial health, like high profitability, low debt, stable earnings, and good governance.

2) What is the difference between quality and perceived quality in investing?
True quality is backed by fundamentals. Perceived quality, on the other hand, is based on how a company appears, which may not reflect its actual strength.

3) Why is perceived quality risky for long-term investors?
Perceived quality can be misleading. Companies that seem attractive on the surface may struggle when the market turns. Without real financial strength or governance, they may not sustain performance in the long run.

*Kaur, S., Seth, S., & Singh, J. (2024). Value and quality investing strategy in Indian stock market. Managerial Finance, 50(9), 1662-1680. https://doi.org/10.1108/mf-02-2023-0112

Investors are requested to take advice from their financial/ tax advisor before making an investment decision.

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
loans
Answer: Clients can get loans on Equity, Debt, Arbitrage, and Liquid funds. Please find below the details for the same.
FUND TYPE SCHEME SUBTYPE LTV %
Equity All Funds (except Small Cap, Sectoral, and Thematic) 45%
Small Cap / Thematic / Sectoral Funds 40%
Debt Liquid, Money Market, Overnight, Ultra Short Duration 80%
Banking and PSU Debt Fund, Corporate Bond, Floater, Gilt, Low Duration, Short Duration Funds, FOF Domestic Debt 75%
Medium Duration, Medium to Long Duration 70%
Dynamic Bond, Gilt Fund with 10-year constant duration, Long Duration Funds 65%
Arbitrage Funds, ETF, 50%
Conservative Hybrid Funds 40%
Balanced All Funds 45%
Note:
Gold Funds, Retirement Funds, Close-ended Funds, and Credit Risk Funds: not accepted as Collateral

ELSS funds during the lock-in period are not eligible for LAS.
Fund Manager INTERVIEW
patner Interview
Mr. Mahendra Kumar Jajoo
Chief Investment Officer - Fixed Income, Mirae Asset Mutual Fund
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Shreeniwas P Gadiyar (ARN-56618)
AMFI REGISTERED MUTUAL FUND DISTRIBUTOR

Shreeniwas P Gadiyar
  • Retirement Assessment
  • Child Future Assessment
  • Portfolio Review
  • Mutual Fund:Debt / Equity / ELSS

"We have taken due care and caution in compilation of this E Newsletter. The information has been obtained from various reliable sources. However it does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions of the results obtained from the use of such information. Investors should seek proper financial advise regarding the appropriateness of investing in any of the schemes stated, discussed or recommended in this newsletter and should realise that the statements regarding future prospects December or December not realise. Mutual fund investments are subject to market risks. Please read the offer document carefully before investing. Past performance is for indicative purpose only and is not necessarily a guide to the future performance."

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