| Posted on March 13, 2020 at 7:50 AM |
A wise person once said, “Life is like a camera. Focus on what’s important and you will capture it perfectly.” Focused Funds have deeply imbibed this philosophy.
What are Focused Funds?
These are a type of equity mutual funds which invest in limited or certain selected kind of stocks. The core objective of these funds is to generate superior returns in the long run. Their stock selection criteria revolve around companies with high growth potential.
As per the recent re-categorization initiative of SEBI (Securities and Exchange Board of India), Focused Funds are permitted to invest in maximum 30 stocks. They need to clearly mention in the scheme objective the intended market capitalization (large, mid, multi or small cap) of stocks it wishes to invest in. The minimum equity exposure in these funds needs to be 65%.
Key features of https://www.etmoney.com/mutual-funds/equity/focused/77" target="_blank" rel="nofollow">Focused Equity Mutual Funds
Best focused mutual funds seek to offer specific market exposure to the investors rather than a broadly spread or diversified portfolio.
Portfolio Composition
Focused Funds are market-cap and sector agnostic. They are free to invest across all market capitalization segments. However, more than 10% of the portfolio is not allowed to be allocated in a single stock.
The fund manager of these funds undertake in-depth market research and allocate the corpus across a restricted number of stocks.
A diversified multi-cap fund?
Many might argue that a focused fund is similar in structure to a diversified multi-cap fund. But there is one major distinction. The portfolio of the best focused mutual fund is much more concentrated than a normal diversified equity mutual funds. So, while all focused funds can be diversified multi-cap funds, the vice versa may not hold true.
Risk
“Beta”, in mutual fund parlance, measures the associated risk of a scheme in comparison to the overall market risk. A value greater than one indicates that the scheme is more prone to volatility than the market. Best focused mutual funds tend to have a beta value higher than one. Also, their “variance” value or measure of volatility is on the higher side. Due to their highly concentrated investment they are considered a high risk instrument.
Return
High risk potentially translates into high returns. If the fund manager’s investment bets turn out good, then the best focused mutual funds can generate superior returns for the investors.
Should you invest in Focused Funds?
Three funds from this category have found themselves in the top five multi cap funds in the last year. So, if you are a seasoned investor with an aggressive risk appetite, you can surely consider investment in the best focused mutual funds. However, you should be okay to witness some short-term underperformance as these funds focus on steady wealth creation in the long run. Also, it is better to take a small exposure to these funds and balance the rest of the portfolio accordingly with other diversified options.
These funds may not be ideal for new investors (irrespective of their risk profile) as the frequent volatility can be quite overwhelming in the beginning. If you are on the lookout for safe or steady options to park your money, you should refrain from investment in focused funds.
Here is a list of the ten best focused mutual funds available in the Indian market.
Final Words
Focused Funds work on the principle that one needs to focus on the possibilities for success and not on the potential for failure. In fact, the focus is sometimes more important than intelligence. And focused equity mutual funds combine both these factors – focus on intelligent choices.
Categories: Investments Ideas
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