This article has the set approach, which is to educate our readers regarding Focused Mutual Funds.
It bears a lot of information about this fund, to help you get through successful investment experience.
As an investor, you must know that not all mutual funds have a diverse combination of investments. When you focus on some specific niche, then the scope of investment gets minimized.
You can term these funds as concentrated funds. As of now, focused mutual funds are quite popular among the investors because these funds offer great returns through limited investment.
But, it is essential for you to learn some basics before you take the plunge. The majority of investors today choose to invest in mutual funds.
Thanks to the variety of mutual funds available out there, investors have different suitability.
As, not all mutual funds are not the same, investors need to have knowledge of other mutual funds to make a sound decision.
About Focused Mutual Fund
Ideally, focused funds are a type of mutual funds that include a plethora of small kinds of stocks. Under this scheme, the fund focuses only on a limited variation from some sectors.
Unlike other funds, these funds don’t invest in a diverse mix of different equity funds. On average fund manager who offers focused funds invest in only 20 to 30 companies or even less.
On the other hand, other funds invest in at least 100 companies. You can term this fund as the best idea funds.
It is mainly because they compulsorily invest in a limited number of companies for buying securities.
The main aim of the fund is to give out maximum returns by investing in assets that are high performing.
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Basics of Focused Mutual Funds
In simple terms, you can say that focused mutual funds are funds that hold a small number of bonds or stocks in dimensions that are identical.
As per the definition, these funds have funds in specific sectors instead of just grabbing a large variety of stocks in mixed positions.
Here the fund manager is an equity fund that invests in a limited amount of stocks. As per SEBI guidelines, here, the fund manager can invest in just 30 stocks.
Just like other funds, these funds can also invest in large-cap, small-cap, and midcap funds.
Often, focused mutual funds are marketed as a fantastic way to diversify the investment.
The majority of the mutual funds specifically hold a position in a vast amount of companies featuring predefined values.
So the investor doesn’t need to stress about selecting security individually.
The best part about this diversification is that it allows the investor to get access to the equity risk premium.
It also minimizes volatility and risk. But at the same time, some of the investors believe that diversification limits their returns.
The money is spread from company to company, so not all of them outperform at the same time.
As an investor, you can invest in a particular sector if you believe that this sector is going to beat. Hence, you can enhance your returns by investing in this sector.
More on Focused Mutual Funds
After careful research, the fund managers allocate their holdings under focused mutual funds.
Due to the search for quality techniques, these funds don’t get an experience of diversification. Above all, they depend on research expertise.
It is mainly useful when it comes to picking up above-average securities. Thanks to this, that returns are more volatile. You can say this fund is either under diversified fund or a concentrated fund.
Other equity funds have a holding in at least 50 to 100 companies. The main goal is to focus on large-cap and mid cap funds.
Some of the funds don’t ideally specify which category they plan to focus on. Mainly the focused funds invest in a smaller number of quality companies so as they aim to generate high returns.
As per SEBI guidelines, out of 30 stocks, at least 65% of the corpus amount under the focused mutual fund is put into equity and equity-related instruments.
Additionally, SEBI guidelines also mention that the fund managers need to note the market capitalization intended through different caps clearly.
Purpose of Focused Mutual Funds
One of the best parts about investing in focused mutual funds is that they promote diversification in equity investments.
The majority of the mutual funds tend to invest in a considerable number of companies that feature preset weights. Hence, investors don’t need to stress on selecting each fund.
No doubt the diversification helps investors to earn significant returns and minimizes risks. But at the same time, these funds also have some fallout.
For example, as the investments are spread across different niches and companies, so they give limited returns at a time because all companies don’t perform equally.
The primary purpose of focused funds is to allocate their holdings across a limited number of equity and debt funds. Above all, research is a must.
These funds don’t offer a plethora of benefits that come along with the diversification of funds. But they indeed provide other services that come along with different stocks.
The returns you gain here are quite volatile as compared to additional mutual funds.
How does Focused Mutual Funds work?
Ideally, a focused fund is a type of mutual fund which chooses to invest in a small number of stocks that are associated in one or other way.
For instance, a sector fund will hold into securities in a particular niche of the economy. Ideally, before investing in any security, the fund manager does a thorough analysis.
Instead of the broad portfolio, which is diverse, the focused funds choose to give some exposure to the market.
After careful research, focus funds divide their portfolios amid the limited number of stocks.
These funds don’t get the benefit of diversification, mainly due to looking for a quality strategy. Results are more likely to be unpredictable.
Generally, mutual funds are free to choose as many as stocks they want to hold. They invest in a plethora of companies under equity mutual funds, but it is not the case with focused mutual funds.
You can invest in a limited amount of joint stocks. Though the number of stocks is limited but there is no restriction on choosing the companies which belong to different sectors.
The fund managers can also select any funds from large cap, midcap, and small cap funds.
Benefits of Focused Mutual Funds
Here are some very important advantages of Focused Funds –
High Potential Returns
Ideally, a diversified equity fund invests in the majority of companies to reduce the exposure of risk. The returns are quite a few in this market as the fund managers focus on only a few funds.
Mainly the catch here is that only some stocks tend to outperform. Under focused funds, the capital is deployed only in few stocks.
But fund managers who make high conviction bets believe that the funds will do well.
You need to know when you invest in hybrid funds; it comes with risk. The risk in hybrid funds mainly depends upon the holdings on the equity fund.
You need to bear more trouble if the value of a stock is more. Primarily the risk also depends upon the sector of equity market you choose to invest in.
The strategy also defines the risk of the component. If the fund is a debt fund, the risk depends if the debt is interest income or capital gains.
The fund which earns returns from interest income is most likely to be less risky as compared to a fund that makes from price appreciation.
The only funds that are low-risk products are arbitrage funds. It is mainly because it doesn’t take any direct calls.
Diversification across various sizes of Companies
The best part about focused funds is that they are free to invest in any type of market capitalization.
Above all, fund managers can invest in anything from large cap, small cap, and midcap funds.
Additionally, fund managers can also switch between different funds as per the changes in the market.
Besides getting a diversified portfolio, you can get a fund that you can change as per the market cycles.
Get Handpicked Funds
Under these funds, fund managers can choose only 30 stocks, so they invest a lot of time in selecting these stocks.
So you can say that assessments take a lot of time so that you can have only the top performing stocks in your portfolio.
Above all, you can get a chance to earn some better returns as compared to the broader stock market.
Diversification across Sectors
No doubt, fund managers can choose only 30 stocks under this fund, but they can pick any stocks from the industry. It makes sure that the portfolio doesn’t become sector specific.
Who can invest in Focused Funds?
Investors who have a risk-taking appetite – Focused funds tend to come with a significant amount of risk as the number of stocks is less.
The catch here is that the fund manager invests in stocks, which will earn great returns in the future as per his assumption.
But if the fund manager fails to make a correct assumption, then they are most likely to suffer losses. Hence, as an investor, you must invest in this fund only if you are willing to take some risk.
Investors with some experience– This fund is just not the right fund for you to invest in if you are new to investment.
It is mainly because focused funds tend to be more volatile as compared to multi-cap funds, especially in the short term horizon.
Hence, you can easily invest in focused funds if you have some investment experience. Above all, before investing here, consider the risks also.
Investors are having five years of investment horizon – If you want to make out the most of focused funds, then you need to have an investment horizon of at least five years.
As focused funds invest only in some funds, it might take time to show some result.
Things to consider before Investing in Focused Mutual Funds
Here are some of the important characteristics which you should know of Focused Mutual Funds before investing.
Focus funds tend to have a concentrated portfolio of 30 stocks in max.
As the fund manager needs to invest the entire amount of corpus in some handpicked stocks, they need to invest some considerable amount in stocks.
Which is the only reason the funds are not diversified completely, and it is the reason behind risk in these funds.
Additionally, just like multi-cap funds, these funds are also quite risky, maybe more than them.
In polarized markets, the focused funds tend to beat diversified funds. Under this fund, only a few stocks tend to drive the markets, while most of the funds don’t grow as such.
You are most likely to get out sized returns if stocks under focused funds are a part of the select list.
Additionally, you can see some returns which will indeed justify your returns if the market rally tends to be broad-based.
Your expense ratio mostly goes into the managing of funds. If you want to earn higher returns, then you need to look out for funds with higher returns.
When you invest in focused funds, you can’t ignore the expense ratio.
If you are planning to invest for the short term, then this fund is just not for you as the funds are most likely to be volatile. To invest in this fund, you need to have some patience.
Focused Mutual Funds – Conclusion
Just like other equity funds, focused funds tend to have some type of taxation. Hence you can earn better returns under focused funds if you have a long-term investment horizon.
Above all, the fund aims to offer high returns by investing in some companies holding high returns.
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