Focused Mutual Fund

A focused mutual fund is a type of mutual equity fund that invests only in a limited number of stocks. These funds can invest in a maximum of 30 stocks as per the guidelines of Securities and Exchange Board of India (SEBI). However, these funds like Multicap mutual funds can invest in any segment in the Market: Large cap, Midcap, Small cap and so on.

To understand how focused mutual funds work, you need to know how and where they invest.

• Focused Funds invest in a limited number of stocks:

  Mutual funds generally have the option to decide how many stocks they want to hold. And typically, equity mutual funds hold anywhere between 50 to 100 stocks. Although this number is dependent on the investment goals of the fund. In contrast, a focused mutual fund can have exposure to a maximum of 30 stocks. In technical terms it refers to running a concentrated portfolio i.e. having bets in select few stocks.

• There are no restrictions on where they invest:

  Focused funds can invest in any company. They can hold securities that belong to different sectors and market capitalizations. That means a focused fund can put money into large caps, medium caps and small caps without any restriction. In other words, these funds are like multi-cap mutual funds with a lesser number of stocks. Fund managers have the freedom to decide how money gets allocated between large, small and medium cap companies.

• High Potential returns:

  Generally, a diversified equity fund has positions in many companies to minimize risk exposure. But as a result, the returns can be low especially in a polarized market where only few stocks outperform. In focused funds, the capital is deployed only in select stocks and these are typically high conviction bets that a fund manager believes will do well.

• Risk:

  Investment in hybrid funds is not devoid of risk. The risk in a hybrid fund primarily depends upon the proportion of equity holding in the portfolio. The higher the equity component, the riskier the fund. The segment of the equity market in which the fund invests and the strategy used will define the risk of the equity component. In the case of debt-oriented funds, risk will be defined by whether the debt portion is managed for interest income or capital gains. A fund that gets its return mainly from interest income of debt securities may be less risky than a fund that relies on gains from price appreciation. Arbitrage funds are low-risk products as no directional call is taken.

• Diversification across Company sizes:

  Focused Funds have the freedom to invest in any market capitalization.. This no restriction means they invest in small cap, mid cap and large cap companies. Plus they can change this split between company sizes according to the market. So not only you get a portfolio that is diversified across market caps but also one which is flexible enough to change as per market conditions.

• Exposure to Handpicked Stocks:

  As these funds can invest max up to 30 companies, hence, fund managers spend a lot of time and effort in picking these select stocks. This in-depth assessments go a long way in ensuring only the best-of-the-breed stocks make it to the portfolio and you get a chance to earn better returns than the broader stock market.

• Diversification across Sectors

  While these funds invest a concentrated portfolio of up to 30 stocks, they can pick these stocks from any sector. This ensures the portfolio doesn't take any sector specific

• Investors who have an appetite for risk:

  Focus funds come with a relatively higher risk owing to the limited number of stocks in their portfolio. The fund manager bets on stocks that he/she believes will provide high returns to the investor. But this concentration means even one bet going wrong can lead to substantial losses. For this reason, only those are willing to take risk which is higher than diversified mutual funds should invest in them.

• Investors with some investing experience:

  If you are new to investing, this may not be the right fund for you to begin your investment journey. This is because focused funds can be more volatile than say a multi cap fund in the short to medium term. So, if you are someone with a few years of investment experience, go with them but do know the risks associated with it.

• Investors with at least 5 year investment horizon:

  These funds are equity funds, so you need to anyways give them at least 5 years to show true potential. On top of that, these funds take selective bets, and those bets might take time to show results. So only those who can stay invested for the time mentioned above should be investing in them

• Risk:

  Focus funds run a concentrated portfolio with a maximum of 30 stocks. Now, since they have to deploy the entire money in a handful of stocks, they have to take big positions in each of those stocks. And this results in them not being truly diversified and that is the source of risk in these funds. The risk these funds carry is higher than diversified mutual funds like multi cap funds.

• Returns:

  Focus Fund returns can beat diversified funds and even broader markets in polarized markets. A polarized market means a select stocks drive the markets forward while the majority of listed stocks don't grow. If the stocks picked by the focus fund are part of that select list, then you will get outsized returns. However, if the market rally is more broad-based, then you might not see the returns that justify the risk you are taking.

• Cost:

  Expense ratio shows how much percentage of your investment is channeled towards managing the mutual fund. Look out for funds with low expense ratio because it means your take home returns will be higher. This is why, you should always keep the expense ratio of a fund in mind when you invest in focused funds.

• Investment horizon:

  Since focused funds are concentrated in a limited number of stocks, the fund could experience volatility in the short term. So, if you are interested to invest for a short tenure, this may not be a suitable option. You need to have the patience to invest for a longer tenure ( atleast for 5 years).

The taxation on focused funds is similar to other equity funds. In case you hold your investments for more than a year, the gains you will earn will be classified as Long-Term Capital Gains (LTCG) and will be taxed at the rate of 10 per cent. This is only applicable if your total gains during the year exceed ₹1 lakh. In case you sell your holding within a year, your Short-Term Capital Gains (STCG) tax will be taxed at the rate of 15 per cent.

To make things simpler, we have compiled a list of the best focused mutual funds with highest returns in the last three & 5years. Investors looking to invest in focused funds should pick the one that meets their investment objectives.

You can invest in focused mutual fund through ET Money app with a few simple easy steps:

• Download the ET Money Application onto your smartphone.
• Create an account
• If you are a first time investor, enter your details to complete the KYC process
• Track and invest in any focused fund of your choice. Or choose from amongst the ones suggested by our experts