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Investing in mutual funds is a wise move because of their diversity and flexibility to meet various investor interests. One such mutual fund is a focused fund. These funds invest in high-performing assets to get the best results possible.
Since every mutual fund is different, investors need to understand the specifics of each kind to make a well-informed decision. Today, we will talk about focused mutual funds that, as their name suggests, are concentrated on a limited number of stocks. Let’s begin!
What is a focus fund?
Among the many types of mutual funds, one that invests in a selected number of equities is known as a focused mutual fund. As per the Securities and Exchange Board of India’s (SEBI) standards, these funds are limited to investing in a maximum of 30 stocks.
Mutual funds may choose how many equities they would like to hold. Usually, equity mutual funds contain between fifty and one hundred stocks. However, this figure depends on the fund’s investing objectives.
A focused mutual fund, on the other hand, is limited to 30 stocks of exposure. In financial terms, it means having bets on only a few stocks or holding a concentrated portfolio.
Similar to multicap mutual funds, these funds can invest in all market segments, including large, mid, or small. The primary objective of such funds is to increase returns by investing in high-performing assets.
Examples of focused funds
Below are some examples of focused mutual funds with 3Y and 5Y annualised returns (NAV as of March 1, 2024):
| Fund | 3Y return (%) | 5Y return (%) |
| Quant Focused Fund Direct Growth | 27.62% | 25.38% |
| SBI Focused Equity Fund Direct Plan Growth | 15.48% | 17.70% |
| HDFC Focused 30 Fund Direct Plan Growth | 28.55% | 22.04% |
| ICICI Prudential Focused Equity Fund Direct-Growth | 23.78% | 21.86% |
Features of a focused equity fund
- Restricted funds portfolio investment
There can only be thirty stocks in a focused mutual fund. Simply put, it means concentrating on managing a few stocks or placing bets on them.
- No limitations on the fund’s asset allocations
Investing in any business is possible with focused funds. You can hold stocks from different businesses and market caps through these funds. This implies that focused equity funds are unrestricted in their ability to invest in small, medium, and large-sized enterprises.
For such funds, the fund managers are in charge of dividing up capital across big, small, and medium-sized businesses.
Benefits of investing in focused mutual funds
Fund Manager Expertise:
As this is not a trend oriented fund, there is a need for detailed fundamental analysis and it is important that the fund manager picks good stocks. The expertise of the fund manager becomes the determinant of success in such a fund.
Impressive profit potential:
A diversified equity fund reduces risk exposure by holding stakes in a wide range of businesses. However, this might lead to modest returns, particularly in a polarised market where a small number of stocks dominate.
Focused funds allocate their resources exclusively to a limited number of stocks, usually highly trustworthy picks that the fund management is confident will do well.
Multi-size company diversification:
Focused funds can invest in small, mid, and large-cap organisations without restrictions. Additionally, they can adjust this division of companies based on market dynamics.
As a result, you have a diversified portfolio across market capitalisation and it is adaptable enough to be modified under changing market conditions.
Exposure to selected stocks:
The fund managers put a lot of consideration and time into choosing these particular stocks because these funds have a maximum investment cap of thirty companies.
This thorough evaluation helps to guarantee that only the finest stocks are included in the portfolio, allowing you to outperform the whole stock market in terms of returns.
Sectoral diversification:
These funds invest in a concentrated portfolio of up to thirty businesses, but they may include companies in any industry. This way, the portfolio will be protected from taking any sector-specific risks.
Factors to consider before investing in a focused fund
- Investing in focused mutual funds is more appropriate for seasoned investors than beginner ones. A crucial factor for such funds is their high-risk tolerance. People with an investment horizon of seven or five years can benefit from focused funds as well.
- Since focused equity mutual funds are usually volatile, investors seeking safer alternatives might want to check out other mutual fund options.
- The primary drawback is that making a limited number of stock investments may result in either success or failure. Therefore, there is a chance that bigger rewards will also come with higher risks.
Conclusion
The small number of available stocks and high potential return on investment make focused mutual funds an attractive option. However, before investing, you should take other considerations into account. Think about your risk tolerance and long-term financial objectives before selecting a fund.
FAQs
A value fund is an equity fund that invests in stocks that are undervalued based on their fundamentals, while a focused equity fund is an equity fund that invests in a limited number of stocks (up to 30) across market caps and sectors.
A flexi cap fund is an equity fund that can invest in any proportion of different cap stocks without any restriction, while a focused equity fund has a restriction on investing in a maximum of 30 stocks. Depending on the fund manager, both funds might be focused or diversified.
Focused funds carry market risk and concentration risk. Market risk is the risk of losing money due to fluctuations in stock prices, while concentration risk is the risk of losing money due to the poor performance of a few stocks that have a high weight in the portfolio.
Focused funds are not suitable for short-term investors, as they require a long-term horizon of at least five to seven years to realise their potential returns. Focused funds are also highly volatile and may not deliver consistent returns in the short term.
Focused funds help with diversification by investing across different sectors and market caps, rather than sticking to one theme or style. This ensures that the portfolio does not have any sector-specific or market cap-specific bias. Focused funds also avoid the disadvantages of over-diversification, which can dilute returns and increase costs.