Is Investing in Focused Mutual Funds a Good Idea?

If you follow the Indian equity or mutual fund market closely, chances are you've come across the term "focused funds". So, what are focused funds, and how do they work? Is investing in them a good idea? Let's find out.

Focused funds are a category of equity-oriented mutual funds that invests in a small variety of stocks. As per the Security and Exchange of India (SEBI) , a focused fund cannot hold more than 30 stocks. The emphasis is on quality over quantity. However, there are no boundaries on where to invest.Focused funds can invest in different sectors and market capitalizations but generally follow a multi-cap approach. The objective is to hit the bull's eye through concentrated market exposure. Thus, fund managers undertake extensive research and adopt a stringent screening process to pick out quality stock that can generate good returns.

Regular mutual funds provide diversification of the portfolio by spreading investments across different securities to help ride through market volatility. However, in a polarized market where only select stocks outperform, too many schemes may reduce the benefit of diversification and impact returns. Fund managers of the focused category strive to create a winning portfolio with hand-picked, high conviction stocks that can beat the benchmark.

Focused funds are considered more volatile and work best for seasoned investors with an aggressive streak and an in-depth understanding of concentrated risks.  While focused equity funds sometimes deliver outsized returns, the lack of diversification in the portfolio can enhance the risk quotient.Let's say a few holdings in a diversified mix drop due to market instability; the impact will not be severe as the additional stock in the portfolio can offset the losses. The focused category with a narrow range of stock has no cushioning to counterbalance the loss if the target misses.

Focused funds are is not for newbies embarking on their investment journey.   Concentrated portfolios are highly volatile, and a rookie investorclueless about the financial markets will not be able to fathom the risks associated with it. Also, regular investors looking at a short tenure should steer clear of this category on the grounds that the equity-oriented funds require at least 5-7 years to show true potentiality.

Listed below are 10 top-performing focused mutual funds in India for 2021 based on both quantitative the qualitative parameters.

• Axis Focused 25 Fund
• Principal Focused Multicap Fund
• SBI Focused Equity Fund
• IIFL Focused Equity Fund
• ICICI Prudential Focused Equity Fund
• Motilal Oswal Focused 25 Fund
• Sundaram Select Focus
• Aditya Birla SL Focused Equity Fund
• Franklin India Focused Equity Fund
• JM Core 11 Fund

It is important to pick the right fund that aligns with your financial objectives and risk profile. A few factors that you must look into are;

• Past Track Record of the Fund Look at least 5-10 years of past record to see how the fund has performed through different cyclical movements in the market.
• Fund Manager Since there is no restriction on the allocation of assets as long as it is limited to 30, the fund manager's role becomes very important. Evaluate a fund manager's credibility and expertise to help you achieve the right results.

While focuses funds carry high return potential, they carry a high-risk quotient too. If you are serious about exploring the focused category, pick funds carefully and make sure to factor in the underlying risks.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.