What are Focused Funds, and are they a good investment choice?
Focused funds are mutual funds that invest in a small number of stocks, usually between 25 and 30. Unlike other mutual funds that spread their investments across many stocks, focused funds concentrate on the best-performing ones. This approach aims to give a higher return by putting more money into stocks that the fund manager believes will do well.
The idea behind focused funds is simple: fund managers select the stocks they believe have the best growth potential and invest more money in them. For instance, if a stock makes up 7% of the fund and its value increases by 50% annually, it significantly boosts its overall performance. However, the fund may face considerable losses if the stock does poorly.
Because these funds hold fewer stocks, they carry higher risks compared to funds that invest in a larger number of stocks. This makes them better suited for experienced investors with a high tolerance for risk.
Focused funds became a formal category in 2017 when SEBI (the Securities and Exchange Board of India) set rules for them. SEBI decided that these funds should not have more than 30 stocks in their portfolios. There are no restrictions on the size of the companies whether they are large, mid, or small cap – which means focused funds can be pretty flexible, similar to Flexi Cap funds.
Key Features of Focused Funds
- Limited Number of Stocks
Focused funds invest in a maximum of 30 stocks, as regulated by the Securities and Exchange Board of India (SEBI). Fund managers must carefully research and select the best-performing stocks for their portfolios. - Diverse Across Market Caps and Sectors
These funds can invest in companies of any size—large, mid, or small-cap—and from any industry or sector. This gives fund managers the flexibility to pick stocks with high potential, regardless of their category. - Potential for High Returns
Focused funds aim to generate higher returns by concentrating investments in fewer stocks. If the fund manager’s stock selection is successful, the returns can be significantly higher than other types of funds. - Higher Risk
Fewer stocks mean less diversification. If one or more stocks perform poorly, it can greatly affect the fund’s overall performance. This makes focused funds riskier than diversified mutual funds.
There are several popular focused funds. These funds often invest in large companies, but some also include mid and small-cap stocks. After SEBI introduced the category, such as ICICI Prudential Focused Equity Fund, Nippon India Focused Equity Fund, SBI Focused Equity Fund, Bandhan Focused Equity Fund, ICICI Prudential Focused Equity Fund, and HDFC Focused 30 Fund adjusted their portfolios to match the new rules.
While focused funds can deliver high returns, they are riskier than diversified funds because of the concentrated investments. If the manager’s stock picks perform well, the returns can be great, but if they don’t, the losses could be large. If you decide to invest in focused funds, make sure you trust the fund manager’s skills and are comfortable with the higher risk involved.
Investing is not just about picking the right fund; it’s also about ensuring it fits your goals and helps you manage risks. So, if you’re considering investing in mutual funds, seek advice from a professional mutual fund distributor and ensure you make the best choices for your future.
