Focused mutual funds are a type of mutual fund that invests in a relatively small number of securities. This can make them more volatile than broader market funds, but it can also give them the potential for higher returns. If you're looking for a way to invest in a specific industry or sector, a focused mutual fund may be a good option for you.

In this blog, we'll discuss the pros and cons of focused mutual funds, and we'll provide some tips for choosing the right one for your investment goals.

What are Focused Mutual Funds?

A focused mutual fund is an equity fund with a concentrated portfolio, investing in a maximum of 30 stocks as per SEBI guidelines. Unlike other mutual funds, there's no restriction on market cap or sectors it can invest in. These funds aim to generate higher returns by focusing on a limited number of high-conviction stocks, following a targeted and well-researched approach. Instead of spreading assets over numerous stocks, they concentrate on a select few sectors. Also known as 'best idea funds,' the main objective is to ensure maximum returns through strategic investments in high-performing assets.

How do Focused Mutual Funds Work?

Like other mutual funds, focused mutual funds pool money from multiple investors and invest in a portfolio of stocks. The fund manager of a focused mutual fund selects a limited number of stocks based on their research and analysis. The fund manager aims to create a portfolio of high-quality stocks that have the potential to generate higher returns over the long term.

Focused funds, a type of mutual fund category, invest in a small number of related securities. For instance, a sector fund will specifically hold stocks within a particular industry segment, following thorough research for inclusion. This focused approach provides precise exposure to the market instead of a broadly diversified portfolio. By dividing their holdings into carefully researched securities, these funds rely on stock-picking skills to outperform, but they lack the benefits of diversification, resulting in potentially more unpredictable returns. They are also referred to as "concentrated funds" or “under-diversified funds.”
 

Who should invest in Focused Mutual Funds:

Who should invest in focused mutual funds:

• Investors with a long-term investment horizon of at least 3-4 years who seek high returns. However, they should be prepared for the possibility of moderate losses.
• Focused equity funds are more suitable for seasoned investors and individuals with a high-risk appetite. Investors who prioritize safety may want to avoid investing in these funds due to their higher volatility.
• Despite the inherent risks, focused funds are expected to gain popularity in the future. They offer the potential for higher returns compared to other mutual funds, allowing investors to maximize their investment gains.
• Focused mutual funds, by investing in a select number of carefully chosen securities, can effectively generate higher returns for investors.
• These types of funds are better suited for experienced investors who have a higher tolerance for risk, which is essential for focused funds. Additionally, they are suitable for those with a longer investment horizon of five to seven years.
• Investors seeking safer investment options should consider other mutual fund choices as focused equity mutual funds are considered to be high-volatility funds.

Key Advantages of Focused Funds:

1. Thorough Company Research: Fund managers conduct in-depth assessments of potential investment companies, ensuring a comprehensive understanding of their capabilities. This meticulous research greatly benefits investors.
2. Maximum Returns: While focused funds carry higher risks, they also have the potential to deliver maximum returns. By concentrating investments on selected companies, investors can more effectively maximize their capital gains.
3. Overcoming Limitations of Mutual Funds: Unlike traditional mutual funds that invest in a broad range of companies and sectors, focused funds eliminate the limitation of potential underperforming stocks. By focusing solely on the stocks of selected companies, these funds enhance the potential for better returns.
4. Investor-Friendly Screening Process: Focused mutual funds adopt a systematic approach by investing in only around 30 stocks. This disciplined process involves rigorous filtering and extensive research to ensure optimal stock selection.
5. Focus on a Few Stocks: While diversification is a key benefit of mutual funds, it can also limit returns. Focused funds, with their carefully researched and limited stock selections, offer the possibility of higher returns by concentrating investments on a few promising stocks.

Risks of Investing in Focused Mutual Funds

There are also several risks of investing in focused mutual funds:

1. Limited Diversification: Unlike diversified funds, focused funds concentrate investments on specific industries or sectors, potentially limiting returns if those areas underperform simultaneously. 
2. Concentration Risk: The fund's performance heavily relies on the performance of the few stocks in its portfolio, making it more susceptible to significant swings in value. 
3. Market Risk: Focused funds are still exposed to overall market fluctuations, which can impact the fund's value based on prevailing market conditions. 
4. Liquidity Risk: These funds may invest in less liquid stocks, posing challenges in selling assets quickly when urgent liquidity is needed. Investors may face difficulties in redeeming their holdings promptly.

How to Invest in Focused Mutual Funds

Investing in Focused mutual funds is easy. It is advised to invest in Focused mutual funds through a mutual fund distributor, an online mutual fund platform, or an Asset managing platform. Here are the steps to invest in focused mutual funds:

1. Choose a focused mutual fund: Choose a focused mutual fund that suits your investment goals and risk appetite.
2. Complete the KYC process: Complete the KYC process by submitting your PAN card, Aadhaar card, and other relevant documents.
3. Submit the application form: Submit the application form along with the required documents and investment amount.
4. Track your investment: Track your investment through the mutual fund distributor or online mutual fund platform. It is indeed an important step.

Examples of Focused Mutual Funds in India

Here are some examples of focused mutual funds in India:

• SBI Focused Equity Fund:

SBI Focused Equity Fund is an open-ended scheme, focusing on a maximum of 30 multicap stocks. It offers long-term capital growth opportunities through a concentrated equity portfolio, making it ideal for investors seeking capital appreciation. 

This Fund is managed by Mr. R Srinivasan with an asset value of ₹ 28972.96 crores. The fund has annualized return values of 21.91% for 3 years and 18.63% since inception with a very high risk.

• Franklin India Focused Equity Fund:

Franklin India Focused Equity Fund aims for capital appreciation by investing in up to 30 high-growth potential stocks across various Indian companies and sectors. The focus lies in the Multi-cap space, offering a balanced approach between growth, risk, and valuation. 

This Fund is managed by Mr. Ajay Argal, Mr. Varun Sharma & Mr. Sandeep Manam with an asset value of ₹ 8,586.49 crores. The fund has annualized return values of 30.11% for 3 years and 13.29% since inception with a very high risk.

• Nippon India Focused Equity Fund:

Nippon India Focused Equity Fund aims to achieve long-term capital growth through an active and concentrated equity portfolio of up to 30 companies across market caps. It also seeks consistent returns by investing in debt, money market securities, REITs, and InvITs. 

This Fund is managed by Mr. Vinay Sharma & Mr. Prateek Poddar with an asset value of ₹  6,358.90 crores. The fund has annualized return values of 28.87% for 3 years and 12.05% since inception with a very high risk.

Conclusion

In conclusion, focused mutual funds offer investors a targeted approach to portfolio management by concentrating investments in a limited number of carefully selected securities. This strategy allows for a higher degree of active management and potentially higher returns. However, it is important for investors to carefully assess their risk tolerance and investment goals before considering investing in focused funds. While these funds can provide opportunities for growth, they also carry higher levels of risk. As with any investment decision, conducting thorough research and seeking professional advice is crucial for making informed choices.