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Is It Worth investing in a Focused Mutual Fund?

Highlights

  • Focused Equity Mutual Funds invest in a maximum of 30 stocks across market capitalizations
  • Scope for greater returns makes one go for this fund
  • However, it does not give you much diversification because the portfolio is limited to just 30 stocks. Other equity funds can have 50-100 in their portfolio.

A focused fund is a type of equity mutual fund that can invest in a maximum of 30 stocks as per the SEBI guidelines. The fund looks to provide greater returns by exposing the assets to a limited number of quality stocks. Some focused funds invest in large and mid-cap stocks, while others do it across the market capitalizations. The variation in the asset allocation makes it necessary for you to know the pros and cons before investing your hard-earned money in this fund. Read this post to know the same.

Pros of Investing in a Focused Fund

Investing in a focused fund comes with the following advantages, take a look.

Scope for Greater Returns – As focused funds invest in stocks with strong fundamentals, you could rack up greater returns on your investments.

Inflation-adjusted Income – No investment is better if it can’t prevent you from the ill effects of inflation. The rapid rise of inflation can make the earnings, which may seem impressive on paper, redundant. As the fund will expose the assets firmly into quality stocks, the investment will most likely sail through the tough market conditions and generate inflated-adjusted corpus.

Cons of Investing in a Focused Fund

Even as the fund comes with distinctive advantages, there are some cons you need to be wary of.

Limited Diversification – The word ‘Diversification’, which is firmly attached with mutual funds, makes a strong appeal amongst investors. But the focused fund comes with limited scope for diversification as the portfolio is limited to a maximum of 30 stocks. It could be all good when the broader market rallies. The rally will increase the value of underlying stocks and reflect into sharp gains for the investors. When the market goes downwards, it will impact your earnings. In one word, if I have to define this fund, I would say, it is not for those who have a moderate risk appetite.

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Things to Keep in Mind

Before investing in a focused fund, ensure the assets are optimally distributed across the stocks. The portfolio should have a greater exposure to companies that have sound businesses and strong cash flows. So, when the market does go down, it doesn’t affect the portfolio. You can check the portfolio composition online.

As there’s limited scope for diversification, it is imperative to conduct a periodic review of the fund performance. If the fund fails to deliver for say 5 years, maybe you should switch to another fund that must have delivered impressive numbers.

Which Focused Funds are Delivering Good Returns?

The table below shows the lump sum returns of top-performing focused funds.

Focused Funds1-year Return3-year Return5-year Return10-year Return
SBI Focused Equity Fund15.17%10.83%12.12%16.91%
Axis Focused 25 Fund13.08%13.11%13.94%-
Motilal Oswal Focused 25 Fund14.54%8.87%10.88%-
Franklin India Focused Equity Fund10.02%7.29%9.97%13.51%

As far as SIP returns are concerned, there are only two focused funds that have impressive figures to boast of.

Focused Funds1-year Return3-year Return5-year Return10-year Return
Axis Focused 25 Fund15.26%10.82%12.47%-
SBI Focused Equity Fund11.15%9.69%11.03%15.32%

Note – Data sourced from Value Research as on October 14, 2019

Disclaimer – “Mutual fund investments are subject to market risks. Please read the scheme related documents carefully before investing”.