Focused Mutual Funds: Meaning, How They Work, and Risk Profile

Published on November 20, 2023 | 5 min read

Key Takeaways

Focused funds are mutual funds that invest in a maximum of 30 stocks selected based on the research-backed decisions of the fund manager.
Focused funds invest across different market segments and are mandated by SEBI (Securities and Exchange Board of India) to invest at least 80% of the total assets in the equity and equity-related instruments.
Investing in focused funds can offer benefits such as high return potential, exposure to different market segments, and active research-based management.
Focused funds also carry risks such as high portfolio concentration, elevated volatility, and over-dependency on the fund manager.

Focused funds are actively managed equity mutual funds that hold a maximum of 30 stocks selected based on the fund manager’s research and decisions. Let’s understand in detail what focused funds are, how they work, and the benefits and risks of investing in them.

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What Are Focus Funds and How Do They Work?

A focused fund is an equity mutual fund that invests in a maximum of 30 stocks, ideally belonging to different market segments, i.e. large-cap, mid-cap, and small-cap, depending on the scheme's mandate. These funds are managed by a professional portfolio manager who selects the stocks they consider to have high return potential based on their research and judgement.

As per current SEBI rules, the fund has to invest at least 80% of its money in equity and equity-related instruments. Since the fund’s portfolio consists of fewer stocks, each stock receives a higher capital allocation, which magnifies both potential gains and losses.

Benefits of Investing in Focus Funds

The following are the benefits of investing in focus funds.

High Return Potential

The strategy focuses on concentrated investments in up to 30 high-conviction stocks, allowing capital to be directed toward the fund manager’s strongest ideas. By avoiding excessive diversification, the portfolio aims to maximise the potential impact of high-conviction selections.

Maximum Flexibility

The strategy offers the flexibility to invest across large-, mid-, and small-cap stocks without being restricted to a particular segment. It can also dynamically shift allocations across sectors in response to prevailing macroeconomic trends and changing market leadership cycles.

Rigorous Active Management

The approach is driven by intensive, fundamental research rather than passive index tracking. Higher position sizing in selected stocks allows the portfolio to emphasise the fund manager’s strongest convictions, with the objective of generating alpha through active stock selection.

Risks of Investing in Focus Funds

The following are the risks of investing in focus funds.

Concentration Risk

Focused funds invest in a maximum of 30 stocks. So, a single stock can have a great effect on overall portfolio performance. If a stock declines sharply, it may have a significant impact on the NAV (Net Asset Value) of the focused fund units since the portfolio has less diversification compared to index funds.

Higher Volatility

Due to low diversification, the fund may experience sharper short-term price volatility and significant decline during market downturns. This may lead to the portfolio experiencing higher volatility and standard deviation compared to diversified portfolios.

Fund Manager Dependency

The focused fund’s investment strategy relies heavily on the portfolio manager’s investment decisions and stock selection. If the stock selection is based on weak research or incorrect investment decisions , your investments are likely to be affected negatively. If the fund house changes its manager, it may also lead to significant changes in the portfolio’s investment approach that may or may not generate the expected returns.

Cycle and Sector Risk

If the fund has investment in particular sectors, it can increase the portfolio’s sensitivity to sector-specific downturns and can also lead to underperformance during periods when the market starts favouring sectors or themes that are absent or less represented in the portfolio.

Focused funds are mutual funds which contain a stock portfolio with a maximum of 30 stocks. These funds are managed by professional portfolio managers who invest their time in researching and allocating money in stocks in which they expect good returns. Investing in focused funds offers benefits such as high return potential, exposure to multiple market segments, and professional management of the funds.

But along with the advantages, there are some risks involved in investing in focused funds such as concentration risks, high volatility, dependence on the fund manager, and sector- or market-specific risks.

FAQs

What is a focused mutual fund?

A focused fund is a mutual fund that has a concentrated portfolio of a maximum of 30 stocks.

How do focused funds work?

In focused funds, the fund managers invest in selected and few stocks which can lead to higher returns if they perform well and bigger losses if they perform poorly.

What are the benefits of focused funds?

The benefits of investing in focused funds include higher return potential, exposure to different market segments, and active research-based management.

What are the risks of focused funds?

The risks of investing in focused funds include higher volatility, dependency on the fund manager, and concentration in a few stocks.

Who can invest in focused funds?

Investors with a higher risk appetite and a suitable long-term investment horizon can consider investing in focused funds.

About Author

Mariyam Sara

Sub-Editor

holds an MBA in Finance and is a true Finance Fanatic. She writes extensively on all things finance whether it’s stock trading, personal finance, or insurance, chances are she’s covered it. When she’s not writing, she’s busy pursuing NISM certifications, experimenting with new baking recipes.