Focused Funds

Focused mutual funds are equity funds that follow a strategy of having a concentrated portfolio. These funds cannot have more than 30 stocks in their portfolio as per SEBI regulation, although there is no limitation on market cap or sectors it can invest.

Advantages of Focused funds

High conviction portfolios where fund managers take big bets on select stocks
Fund managers can allocate investments across sectors and market caps based on opportunities.

All about Focused Funds

How do Focused Mutual Funds Work?

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 restriction. In other words, these funds are like Flexi-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.

Who should Invest in Focused Mutual Funds?

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 Flexi cap fund in 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 a 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 deliver results. So only those who can stay invested for the time mentioned above should be investing in them

Tax Implications on Focused Mutual Funds

The taxation on focused funds is similar to other equity funds. If you hold your investments for more than a year, the gains you will earn will be classified as Long-Term Capital Gains (LTCG) and taxed at the rate of 10 percent. 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 percent.