- Are focused mutual funds a safe investment bet given that they invest in a maximum of 25 stocks?
- No, if you are risk-averse. Otherwise, you can allocate but a very less proportion of your investment portfolio
Mutual funds can be broadly classified into three types-equity, debt, hybrid funds. Within the equity funds category, you have different kinds of equity funds such as large-cap funds, mid-cap funds, small-cap funds, international funds, etc. Similarly, in debt funds, you have short- term bond funds, liquid funds, overnight funds, gilt funds, etc. Focused funds are often confused with sector funds, but both are different. Sector funds invest only in one sector whereas focused funds can invest in multiple sectors, you can read more about sector funds in another post of ours-https://www.wishfin.com/mutual-fund/sector-funds-are-these-a-good-investment/. Let us understand more about focused mutual funds.
What are Focused Mutual Funds?
Focused mutual funds are a type of equity fund that follows a concentrated portfolio strategy. A concentrated portfolio strategy means investing in about 20-30 stocks in the portfolio. Most of the other types of equity funds usually have 50-80 stocks in the portfolio and are more diversified. In a focused mutual fund, the fund manager endeavours to buy the best 20-30 stocks which he/ she feels will do well in the future.
The idea is to focus on a lesser number of companies, monitor them closely and deliver superior results. These funds do not necessarily focus on only one sector, the stocks picked can be from various sectors. In terms of taxation, focused mutual funds being categorized as equity funds have the same taxation rules as any other equity fund. Focused mutual funds have certain advantages and some disadvantages, let us look at both.
Advantages of Focused Funds
- Focused funds can generate higher returns since only the best 30 stocks are a part of the portfolio, this is subject to them being managed well by the fund manager.
- The stocks that are picked in focused mutual funds are better researched since the scope of research for the fund managers is narrower with a sharper vision.
- These funds can take higher bets on sectors vs other equity funds, and if that sector does well, it could have a significant impact on the returns.
Disadvantages of Focused Funds
- The first advantage of focused funds as mentioned above is returns, which could also be a disadvantage when markets are not performing well. It can work as a double-edged sword. In the case of a market downturn, focused funds could underperform other equity funds.
- The risk in focused mutual funds is slightly higher than other equity funds since they are less diversified.
- One should have some understanding of how sectors and stocks work before investing in focused mutual funds i.e. they are not for a know-nothing investor.
Three Best Performing Focused Mutual Funds
SBI Focused Equity Fund
This fund is offered by SBI Mutual fund, which is also the largest mutual fund company in India. This fund currently comprises 24 stocks across cap curves-mid, small & large. Almost 58% of the portfolio is in large companies and the rest in mid and small-caps. This fund was launched on 11th Oct 2004 and manages an AUM of INR 8,012 crores. This fund has been a consistent performer and with the last 10 year return at 14.18% annualized. It is rated five stars by Value Research and is our top pick among focused mutual funds.
Axis Focused 25 Fund
This fund is offered by Axis mutual fund, which is one of the largest fund houses in the country. As the name suggests, this fund can invest the maximum in 25 stocks, with the current portfolio comprising 24 stocks. This fund has a higher allocation to large companies with almost 75% in large-cap stocks and the rest in mid and small caps. This fund was launched on 29th June 2012 and manages an AUM of INR 9,428 crores. This fund has delivered an impressive 12.08% annualized return since launch and has been one of the top performers. This is also rated Five Stars by Value Research.
Motilal Oswal Focused 25 Fund
This fund is offered by Motilal Oswal mutual fund and was launched on 13th May 2013. The fund currently manages an AUM of INR 1,122 crores. The current portfolio comprises 21 stocks which makes it the most concentrated among the three. The majority of the portfolio-about 80% is in large-caps with the rest in mid and small-caps. This fund has returned 10.92% annualized since launch and is rated four stars by Value Research.
Should You Invest in Focused Mutual Funds?
We would recommend investing in one of these three focused mutual funds. You could look at allocating 10-15% of your portfolio in the same. However, one needs to be mindful of the fact that focused funds are concentrated bets which can backfire in certain economic conditions. Over allocation to a handful of stocks or sectors might not work sometimes. But these also have the potential to deliver superior returns. Keeping this in mind, one should have some allocation but not over-allocate and invest only if you have the risk appetite. If your risk appetite is low or moderate, we recommend you stick with large-cap or diversified funds and avoid investing in focused mutual funds.