What are Focused Funds?
Mutual Funds investing in a limited number of stocks are known as Focused Funds. According to the Securities and Exchange of India (SEBI) categorisation and regulation of Mutual Funds, a focused fund is allowed to invest in a maximum of 30 stocks which further requires ‘search for quality’ strategy and expert research before any investments are made. Also, it holds stocks in less than three sectors only.
Since focused funds allocate the holdings between a limited number of cautiously picked stocks with potential business plans, the focused fund managers are typically able to obtain better returns as compared to the returns obtained by funds with diverse stock portfolio.
5 Best Focused Funds for 2020
Given below is a list of top 5 focused funds which can be considered for investments in 2020:
|Fund Name||AUM (Crores)||3-Year Returns (%)||5-Year Returns (%)|
|Axis Focused 25 Fund||Rs.9,110||19.44||13.30|
|SBI Focused Equity Fund||Rs.6,924||18.49||12.51|
|Motilal Oswal Focused 25 Fund||Rs.1,205||13.48||9.92|
|Aditya Birla Sun Life Focused Equity Fund||Rs.4,422||12.12||8.85|
|Franklin India Focused Equity Fund||Rs.8,920||12.28||8.80|
(Data as on 27th January 2020; Source- Value Research)
- Focused funds are also known as Concentrated or Under-Diversified Funds because they formulate a concentrated portfolio of limited stocks from selected companies
- The fund’s portfolio has a maximum number of 30 stocks
- A stringent research is used for above-average stock picking with the sole motive of obtaining fulfilling returns
- These funds have at least 80% of the total assets invested in equity and equity related instruments
- Invests in issuers from domestic and international market
Advantages of investing in Focused Funds
- These funds function with an objective of delivering higher returns with limited investments in companies with high growth potential
- Stocks for allocation of assets are selected after a stringent approach taken by the fund managers to invest in the right stocks and earn higher returns. A top down approach is employed to choose the best stocks and place the bets
- Focused funds are highly methodical and most of such funds have stocks from large cap or multi cap companies. It is better to invest in a portfolio which is concentrated but has a handful of nascent large cap stocks than a overly diversified mid cap funds with potential liquidity issues
Who Should Invest in Focused Fund?
- Investors who are willing to invest in a concentrated portfolio can opt to invest in a focused fund
- The risk involved in Focused funds is higher compared to other mutual funds. But if an investor is comfortable with high volatility, these funds can be very promising
- It is suggested that one should keep their corpus invested in a focused fund for at least 5 to 7 years to get efficient returns. Investors who are seeking a long-term investment option should invest in these funds
Related article: Best 5 Focused Funds for 2020
Things to be considered
- Financial Goal: If you have a short term financial goal, you should not consider investing in focused funds. To get higher returns, it is suggested that the funds should be kept invested for at least 5 to 7 years. Also, according to historical returns, Focused funds have out-performed large cap funds over a longer period of time
- Risk Tolerance: Focused funds tend to be more volatile because of the capping on the stock investments. During economic downturns, Focused funds are recorded with a higher degree of fall as compared to that of diversified funds. If you have a high risk tolerance, you can invest in these funds
- Fund Management: The performance of a mutual fund is largely affected by how the fund portfolio is managed and monitored. Thereby, it is very important to engage with a professional management to accrue better returns. As and when the fund manager’s understanding of a certain stock goes wrong, the possibility of loss in the fund increases
The Long term capital gains (LTCG) of more than Rs.1 lakh are taxable at 10%. On the other hand, Short term capital gains (STCG) are taxed at 15% if they are redeemed before completion of 1 year of investment.
If an investor has made a capital gain of ₹50000 on investment in an focused equity fund, Short Term Capital Gains Tax of 15% would be levied if s/he withdraws the amount within one year of investment. The payable tax would be ₹7500.
Also, if an investor has made a capital gain of ₹1.5 lakh on investment in an equity fund, and withdraws the amount after 1 year of investment, Long Term Capital Gains Tax of 10% would be levied on ₹50,000. ₹1Lakh is exempted from taxation. The payable tax would be ₹5,000.
How are Focused Funds better than Diversified Funds?
For irregular investors, Focused fund can be the top investment option as it provides a broader opportunity for the investors to grow their wealth. Where selection of stock is known as the primary factor for better returns, the composition of the portfolio also plays a vital role.
On one hand, Diversified Funds are usually recorded as less volatile and highly consistent funds for long-term investments. But, the highly concentrated portfolio- spreading out the assets thin across stocks- leads to dissatisfied rewards to stringent fund selection. Moreover, it becomes very complicated for the fund manager to keep a record of 60 to 80 stocks. On the other hand, the acute selection and investment involved in Focused funds renders the fund manager with better growth opportunities. The concentrated portfolio delivers an enormously positive impact on the fund but also intensifies the impact from a wrong decision in stock selection.
Over a period of time, it is recorded that the performance of diversified funds has outshined the returns obtained by Focused funds. Large cap and Multi Cap are the major categories which are implementing the focused strategy for investing into stocks whereas due to the higher risk profile, very few mid cap categories run the concentrated strategy.
How to Invest in a Focused Fund?
There are different methods through which one can invest in a focused fund:
- Offline mode – Visiting the nearest branch office of the fund house and investing in the desired scheme. You must carry all the required documents such as Identity Proof, Address Proof, Cancelled Cheque, Passport size photos, PAN Card and KYC Documents handy. You can also invest offline through a broker. However, this would then be a regular fund and not a direct fund. Think of it like a charge brokerage which gets deducted from the total investment amount
- Online Portal – If you want a hassle free mode of investing with no commissions and brokerage, you can choose websites like Paisabazaar.com which allow the investors to compare more than 1,700 funds at one platform instead of visiting the website of each AMC and then searching for numerous funds. You can select the fund in which you want to invest, look at the details and compare similar schemes as well as use SIP Calculator or Lumpsum Calculator to estimate the future value of your investment
List of More Focused Funds to Invest in 2020
Here is a list of concentrated funds which have been recorded as some of the best mutual funds from the category:
|Fund Name||AUM (Cr)||1 Year Return||2 Year Returns||3 Year Returns|
|Aditya Birla Sun Life Focused Equity Fund||4,100.57||-5%||8%||9%|
|Axis Focused 25 Fund||7,784.89||-7%||13%||14%|
|BNP Paribas Focused 25 Equity Fund||225.19||-5%||–||–|
|DSP Focus Fund||1,779.43||-8%||6%||10%|
|Franklin India Focused Equity Fund||8,182.84||-4%||8%||11%|
|HDFC Focused 30 Fund||466.00||-9%||5%||6%|
|ICICI Prudential Focused Equity Fund||644.64||-10%||6%||7%|
|IDFC Focused Equity Fund||1,416.11||-18%||8%||7%|
|IIFL Focused Equity Fund||206.33||-1%||10%||–|
|JM Core 11 Fund||47.93||-8%||9%||12%|
|Motilal Oswal Focused 25 Fund||1,044.66||-4%||10%||11%|
|Principal Focused Multicap Fund||309.37||-6%||7%||8%|
|Quant Focused Fund||3.91||-9%||6%||11%|
|Reliance Focused Equity Fund||4,094.41||-11%||7%||11%|
|SBI Focused Equity Fund||4,984.06||-3%||10%||13%|
|Sundaram Select Focus||975.66||-3%||12%||9%|