What Are Focused Mutual Funds?

Focused mutual funds are nothing but a sub-classification of equity mutual funds that are formed from a concentrated portfolio of securities, usually not exceeding 30 companies. This is opposite to most mutual funds, which can have any number in hundreds of underlying securities. Thereby, they are designed for optimal returns from concentrated investments in a few high-conviction stocks, very often across sectors and market capitalizations.

Why Invest in Focused Mutual Funds?

The focused mutual funds are those that have a potential for higher returns compared to others by investing their money in fewer stocks, hence carry a greater overall risk compared to other diversified funds. Since focused funds concentrate on a small number of stocks, it frees the fund manager for better stock selection, whereby researching and monitoring companies bring potentially higher returns.

Key Characteristics of Focused Mutual Funds

• Concentrated Portfolio: Focused funds can have positions in a minimum number of stocks, generally up to a maximum of 30, as mandated by SEBI. This gives the fund managers the ability to concentrate on high-conviction ideas but increases the risk considerably, since the performance of the fund depends on its equities.
• Flexibility Across Market Caps: These funds can invest in companies of any size—large-cap (well-established, stable companies), mid-cap (growing, mid-sized companies), or small-cap (smaller, potentially high-growth companies)—enabling them to benefit from diversified market opportunities.
• High Risk, High Reward: Because the investment is solely focused, the risk-reward ratio runs high for focused funds. Investors should buckle up for a bumpy ride and changes in portfolio value.
• Long-Term Investment Horizon: As implied in the foregoing flashback, focused funds are best put in the hands of an investor with a long investment horizon stock market for periods exceeding five years to stomach shifts in the market and bring into play the power of higher returns.

How Focused Mutual Funds Work

Focused funds invest at least 65% of the money in equities, as per SEBI regulations. They can be sector-agnostic and typically operate with a bottom-up investment style. Fund managers would choose stocks based on individual merits rather than aligning around that particular sector or market cap.

An example is that SBI Focused Equity Fund invests across market capitalization with the primary objective of long-term capital appreciation.  

Advantages of Focused Mutual Funds

• Higher Returns: There is every possibility that a focused portfolio might just outperform the rest, as long as the handpicked stocks come to fruition. There can be substantial upside to this kind of focused investment compared to a lot of other funds which are more diversified.
• Expert Management: Since these funds have smaller investments, fund managers would have the time for more adequate research in investments and active management, ahead of better stock selection.
• Flexibility: Unlike thematic or sectoral funds, focused mutual funds are not stuck with one sector or theme. The mutual funds that are there in focus can invest across sectors on any stock, therefore providing the investor with a larger scope to grasp market opportunities.

Disadvantages of Focused Mutual Funds

• Higher Risk: As an investment, this is riskier because where there are only a very restricted number of securities, lousy performance in just a small amount can imperil the performance of the whole fund. This is against the diversified fund from which the underperforming stocks are cushioned by the big quantity of holdings.
• Volatility: As compared to other funds, Focused funds have more volatility. This makes the investment only suitable for an individual who is ready for this short-term rollercoaster, and they have to be high in their risk tolerance.
• Manager Dependency: The success of centric funds greatly rests with the experience of the fund’s manager. Weak stock selection or timing skills can result in gross underperformance.

Who Should Invest in Focused Mutual Funds?

Focused mutual funds would be appropriate for investors with:

• High Risk Tolerance: Given the concentration of these funds, they are best for the investors who are comfy to take a greater level of risk and volatility.
• Long-Term Investment Horizon: Such funds would be good for investors willing to stay invested for a medium-to-long time, typically 5 to 7 years and even more, reaping the potential of higher returns that these funds might offer.
• Active Interest in Investments: Active and involved investors who can manage their investments will prefer focussed funds. They would want more insight into market dynamics and individual stock behaviours.

How to Invest in Focused Mutual Funds

Investments in focussed mutual funds are made just like in any other mutual fund. You can invest directly when you visit the fund house’s website and its investment portal, or you can do so through online platforms such as Prodigy Pro by BFC Capital, that offer you tools and resources to manage your investments effectively. Otherwise, you may invest through a financial advisor.

While investing in focused funds, much has to be taken into consideration, such as the track record of the fund, the experience of the fund manager, and whether this fund aligns with your goals of investment. Since these funds have a concentrated portfolio, they are more important to get an idea of the potential risks and returns. With Prodigy Pro, we can help you further analyze those elements with insight tools that can help make better decisions..

Common Myths About Focused Mutual Funds

• Myth1: Focused Mutual Funds are Only for Aggressive Investors: Though the funds do come with a higher amount of risk, focused mutual funds are not exclusively meant for aggressive investors. Even long-term horizon investors with clear market vision can be duly benefited by such focused mutual funds.
• Myth 2: All Focused Funds Are the Same: All focused mutual funds certainly don’t make for the same. They can differ a great deal in investment strategies and sectors of choice, let alone in risk profiles. Investors thus need to go very carefully through the objectives and strategies enlisted by a fund before investing in it.
• Myth 3: The performance of focused funds is always superior to diversified funds. This is a fallacy; though focused funds might outperform, it cannot be stated to do so always. In their very concentrated nature lies the other side of the coin—they underperform if the selected stocks fail to perform..

Conclusion

Focused mutual funds present a wonderful investment opportunity if someone is ready to bear higher risks to get better returns. These kinds of funds, with ready determination and willingness, have performed well over long periods. While that does make them a pretty volatile vehicle for strategic stock selection, they do have the possibility of market outperformance. As with all funds, people need to remember to keep their tolerance for risk, their investment objectives, and the past performance of the fund manager in mind when considering investing in a concentrated mutual fund.

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Disclaimer – This article is for educational purposes only and by no means intends to substitute expert guidance. Mutual fund investments are subject to market risks. Please read all scheme-related documents carefully before investing.