Summary:
An investment strategy or mutual fund that has a concentrated portfolio of a relatively limited number of stocks and securities is known as a focused fund. This blog explains how investors navigate their way and put their money in them.
Introduction to focused funds
An investment strategy or mutual fund that has a concentrated portfolio of a relatively limited number of stocks and securities is known as a focused fund. In the case of diversified funds, the investments are spread across a number of assets, industries and/or sectors. For focused funds, there are a limited number of positions. They range from 20 to 30 stocks and may also be fewer. The goal of focused funds is to concentrate investments in a manner that the fund manager anticipates the best opportunities for generating high returns. The following are some of the key features of focused funds:
- Limited holdings: Focused funds usually hold a limited number of stocks and/or securities in comparison to funds that are diversified. Through this, the fund manager is able to closely monitor and review each holding in order to be able to select high-quality investments.
- Strong conviction: Those who manage focused funds usually have strong convictions regarding the chosen investments. These managers anticipate the selected securities will be able to generate significant returns and grow.
- Higher risks and potential for returns: In comparison to diversified funds, focused funds are considered to be riskier because the performance is heavily reliant on a few stocks and/or securities in the portfolio. If the key holdings perform as expected, the fund can generate higher returns. However, if they underperform, the losses are more significant and there aren't other stocks to cushion the blow.
- Active management: Owing to the limited number of holdings, managers need to actively manage focused funds. Closely tracking the performance of the selected stocks, making decisions to purchase, sell and/or hold and making frequent adjustments to the portfolio to mitigate risks and increase returns are what the manager needs to do.
- Sector or style focus: Usually, focused funds specialise in a specific sector, investment method (e.g., value or growth) and/or market capitalisation (such as small-cap or large-cap stocks). This specialisation helps investors adjust their portfolios depending on the specific goals and/or strategies.
Top five focused funds in India:
- Axis Focused 25 Fund: Launched by Axis Mutual Fund House on June 29, 2012, Axis Focused 25 Fund is a Flexi Cap Equity scheme that is open-ended. Over time, the fund has been able to successfully outdo its benchmark. Given that it has an AUM that is decent, it is expected to register growth in the future and is one of the best focused funds.
- SBI Focused Equity Fund: By sticking to its goals and strategy, SBI Focused Equity Fund manages to fully utilise the growth opportunities that were available. In addition to investing in leading names like SBI, HDFC Bank Ltd., and P&G, the managers of the fund have also invested in Alphabet Inc Class A, as well as other big names such as Solar Industries Ltd.
- Quant Focused Fund Direct-Growth: Launched by Quant Mutual Fund House on January 1, 2013, this is a large-cap equity scheme that is open-ended. The fund's goal is to generate earnings from investments in blue-chip firms.
- Motilal Oswal Focused 25 Fund: Launched on May 13, 2013, by Motilal Oswal Mutual Fund House, it is an open-ended large-cap equity scheme. Among others in the equity-focused category, its expense ratios are among the lowest. Given that it has a decent AUM, there is potential for growth in the years to come.
- The Aditya Birla Sun Life Focused Equity Fund: Mr. Mahesh Patil, co-CIO of Aditya Birla Sun Life AMC, manages this large-cap equity scheme that is open-ended. It was launched on January 1, 2013, and has consistently delivered good returns. In comparison to its benchmark, it has a low beta and expense ratio, making it one of the best focused funds.
Summing up
For investors to generate returns from focused funds, choosing the right sector is the biggest and most crucial step. Adjustments for other deviations can be made but it is imperative to put money in the right industry. Investors who are considering focused funds need to be aware of the higher risks that are associated with them. Determining the financial goals, tolerance for risk, availability of capital and the time horizon help with making this decision.
Given that they are concentrated in nature, these funds are more volatile and prone to individual stock and/or sector-specific risks. Before choosing the manager, it is essential to find out more about their strategy, previous performance and the specific investments within the fund itself. Usually, diversification is a technique for risk management. But for focused funds, there is an intentional departure from such a strategy because of the pursuit for higher returns. However, the decision to opt for risky investments doesn’t imply that decisions are going to be made hastily and with basis. A capable fund manager with the necessary expertise should be able to set the ball rolling in the right direction and generate returns in the long run.