Focused Funds

A focused mutual fund is one such category in which your money goes into selected securities. The number of stocks and bonds in this mutual fund might be low, but they have the potential to earn. For instance, a mutual fund holds securities of more than 100 companies, but in focused funds, this number will be limited to 30.

What Are Focused Funds?

Focused funds are a type of equity mutual fund that invests in a limited number of stocks, typically 20-30 companies. This concentrated fund is a small group of high-performing assets. The primary aim of focus funds is to provide maximum returns by investing in a concentrated portfolio of stocks.

Best Focused Funds

List of the top-performing focused funds sorted by returns with their AUM and Expense Ratio.

How Focused Funds Work?

Focused funds operate by investing a significant portion of their assets—at least 65%—in equities and equity-related instruments. Unlike diversified mutual funds, which may hold 50 to over 100 stocks across various sectors, focused funds concentrate their investments on a select few stocks. This concentrated approach allows fund managers to conduct in-depth analysis and research on each stock, aiming for higher potential returns.

Advantages of Investing in Focused Funds

Focused funds offer several potential benefits for investors:

Potential for Higher Returns: Focused funds can deliver higher returns than diversified funds by concentrating on a select group of stocks. If the chosen stocks outperform the market, the fund's performance can be exceptional. However, it's important to note that this also means higher risk.

Active Management: Focused funds typically involve more active management by fund managers. These professionals can closely monitor the performance of the fund's holdings and make adjustments as needed, potentially leading to better risk management and returns.

Clear Investment Theme: Focused funds often adhere to a specific theme or investment style, making it easier for investors to understand the fund's objectives and align their investment goals accordingly. This transparency can help investors make informed decisions.

Disadvantages of Investing in Focused Funds

Investing in focused funds, which typically concentrate on a limited number of stocks (usually between 20 and 30), presents several disadvantages that potential investors should consider.

Higher Risk and Volatility: Focused funds inherently carry a higher risk compared to diversified funds. Their concentrated nature means that the performance of a few stocks can significantly impact the overall fund performance. If one or more of these stocks underperform, it can lead to substantial losses, making these funds more sensitive to market fluctuations and trends.

Limited Diversification: More diversification is needed. Unlike diversified funds that spread investments across a broader range of stocks, focused funds limit their holdings to a smaller number. This concentrated investment strategy can lead to increased volatility and risk, especially during market downturns when the impact of poor-performing stocks is magnified.

Dependence on Fund Management: Focused funds place a disproportionate reliance on the fund manager's expertise. Their success largely hinges on the manager's ability to select the right stocks and make timely investment decisions. If the fund manager makes poor choices or fails to adapt to changing market conditions, the fund's performance can suffer significantly.

Who Should Invest in Focused Mutual Funds?

A focused fund is best suited for experienced investors who are familiar with the dynamics of the stock market and have previously invested in mutual funds. A focused mutual fund typically involves a higher degree of risk due to its concentrated portfolio, making it more appropriate for those who can handle short-term market volatility. Unlike diversified mutual funds, which spread investments across a wide range of stocks, a focused fund invests in a limited number of stocks, often between 20 to 30, increasing its exposure to individual stock performance.

Investors in a focused mutual fund need to have a high-risk tolerance, as the concentrated nature of these funds means they are more susceptible to market fluctuations compared to a typical equity fund. Because focused funds invest in fewer stocks, they can experience higher volatility, which might be challenging for less experienced investors to manage, especially if they are looking for short-term gains. However, for those with a long-term investment horizon, the potential for significant capital appreciation can make focused funds an attractive option.

Focused mutual funds invest with the goal of achieving higher returns, but this comes with the trade-off of increased risk. Fund managers of focused funds are tasked with carefully selecting a smaller number of high-conviction stocks, which they believe will outperform the market. To fully realize the potential of these investments, investors should plan to hold focused funds for a period of at least 5-7 years, allowing time for the equity fund’s strategy to play out and for long-term capital gains to be realized.

Equity funds like focused funds may deliver higher returns over the long term, but the concentrated investment approach means that investors should be prepared for the possibility of short-term capital gains, as well as the inherent risks of investing in a smaller number of stocks. Fund managers play a critical role in the performance of focused mutual funds, making their experience and strategy crucial factors for investors to consider. For those seeking higher returns and willing to accept the associated risks, focused mutual funds can be a suitable choice.

Factors to Consider When Investing in Focused Funds

When considering investing in focused funds, several key factors should be evaluated to ensure alignment with your financial goals and risk tolerance:

Investment Horizon: Focused funds are best suited for long-term investors. A typical investment horizon of 5 to 7 years is recommended to maximize returns, as these funds can be volatile in the short term due to their concentrated nature.

Risk Tolerance: Investors should assess their risk appetite. Focused funds carry higher risks compared to diversified mutual funds because they invest in a limited number of stocks. This lack of diversification means that poor performance from a few stocks can significantly impact overall returns. Those with a high-risk tolerance and experience in the market may find focused funds more suitable.

Fund Manager Expertise: The success of a concentrated fund heavily relies on the expertise of the fund manager. Investors should consider the manager's track record, investment philosophy, and ability to conduct thorough research to select high-performing stocks. Understanding the fund's top holdings and the manager's strategy can provide insights into potential performance.

Financial Objectives: Your financial goals should align with the characteristics of focused funds. If you are looking for aggressive growth and can tolerate market volatility, focused funds may be appropriate. Conversely, if you seek stable returns or have short-term financial goals, other investment options might be more suitable.

Tax Implications on Focused Funds

The tax implications of focused mutual funds are significant. Long-term capital gains (LTCG) held for over a year are taxed at 12.5%, while capital gains and short-term capital gains (STCG) held for a short period of less than a year are taxed at 20%.

Focused mutual funds are considered equity-oriented for tax purposes, requiring a minimum of 65% investment of equity funds in equities. It would help if you thought about these tax implications when planning mutual fund investments.

How to Invest in a Focused Fund?

To begin investing in Focused Fund, follow these steps:

• Open the INDmoney app and log in with your credentials.
• Navigate to the "Mutual Funds" section within the app.
• Use the filter options to select "Focused Funds" to view the available choices.
• Decide between a lump sum investment or a Systematic Investment Plan (SIP) for regular investments.
• Enter the desired investment amount and confirm the transaction.