Mutual Fund Holdings
Mutual fund holdings definition and what makes them important to know
When doing research and analyzing mutual funds, you'll likely run across a term called holdings. Analyzing a mutual fund's holdings just as important as taking a closer look at any other product before buying it: Before making important purchases like a car or a house, you take a look inside. Smart investors do the same with mutual funds.
Mutual Fund Holdings Definition
A mutual fund's holdings represent the securities (stocks or bonds) held in the fund. All of the underlying holdings combine to form a single portfolio. Imagine a bucket filled with rocks. The bucket is the mutual fund and each rock is a single stock or bond holding. The sum of all rocks (stocks or bonds) equals the total number of holdings.
How to Determine the Ideal Total Number of Holdings
In general, mutual funds have an ideal range for the total number of holdings and this range depends upon the category or type of fund. For example, index funds and some bond funds are expected to have a large number of holdings, often in the hundreds or even thousands of stocks or bonds. For most other funds, there are disadvantages to having too few or too many holdings.
Typically, if a fund only has 20 or 30 holdings, volatility and risk can be significantly high because there are fewer holdings with a larger impact on the performance of the mutual fund. Conversely, if a fund has 400 or 500 holdings, it is so large that its performance is likely to be similar to an index, such as the S&P 500. In this case, an investor may as well just buy one of the best S&P 500 index funds rather than hold a large-cap stock fund with hundreds of holdings.
The fund with very little holdings is like the small boat at sea that can move quickly but is also vulnerable to the occasional large waves. However, the fund with too many holdings is so big it may not be harmed as much by shifting waters but it can't move away from a glacier that can rip its hull and sink like the Titanic.
Look for a fund with at least 50 holdings but less than 200. This may assure the "just right" size that is not too small or too large. Remember the apples-to-apples rule and look at the averages for a given category of mutual fund. If the fund you are analyzing is much lower or higher in the total number of holdings than its respective category average, you may want to dig deeper to see if this fund is good for you.
Also, you will want to see if the fund you are analyzing fits with the other funds in your portfolio. A fund with only 20 holdings can be risky on its own, but it may work as one part of a diversified mix of mutual funds within your own portfolio.
Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.