A Beginner’s Guide To Focused Funds

Mutual fund investment is a wise decision because of its variety and suitability for different investors. Since not all mutual funds are the same, investors must know the details about each type of fund to help make an informed decision.

What Are Focused Funds?

A focused mutual fund is a type of equity mutual fund that invests in a limited or a small number of stocks. The Security and Exchange of India or SEBI have guidelines allowing focused funds to invest in a maximum of 30 shares. Thus, focused fund meaning is that the investment focuses on just 30 stocks and not more.

It is the only mutual fund with such guidelines as the other mutual funds can invest in up to 100 stocks. A focused fund may focus on large-cap, mid-cap or small-cap funds. They do not spread assets over a large number of stocks and focus only on a few sectors. The main idea of a focused mutual fund is to ensure maximum returns through investment in high-performing assets. Thus, they choose stocks as per their mandate. Focused funds are also referred to as ‘best idea funds.’

Pros And Cons Of Focused Mutual Funds

Before you invest in any mutual fund, it helps to know why it can work and the risks it may pose. Here are some benefits and risks with focused funds: PROS:

• Investor-friendly Screening Process

  Since focused mutual funds invest only in around 30 stocks, they follow an orderly process. The fund manager selects stocks only after a thorough stringent filtering process after extensive research.

• Focus on a Few Stocks Help

  One of the best benefits of mutual funds is diversification. It helps to minimise risks and at the same time, maximise the returns. A drawback of investing across sectors and stocks is limited returns.

  Since focused funds invest only in carefully researched stocks and are limited to only a few stocks, it could be possible to get high returns.

Cons:

Who Should Opt For Focused Funds?

Focused mutual fund investments suit experienced investors better than new investors. The former has a high-risk appetite, which is crucial for focused funds. It is also suitable for those with a time horizon of five to seven years.

Focused equity mutual funds are regarded as high volatile funds, and hence those looking for safe investments should consider other mutual fund options.

• The main disadvantage is that investing only in a few stocks can either hit the target or miss the mark. So, there is a possibility of higher risk as well, along with higher returns.
• The lack of diversification also poses a high risk. Thus, focused funds are highly volatile.

Points To Note Before Investing In Focused Funds

• Tax Implication

  Being an equity-oriented fund, focused funds are taxed as equity funds. In the case of LTCG or Long-Term Capital Gains, a 10% tax is applied on gains more than Rs. 1 lakh in a year. For STCG or Short-Term Capital Gains, the gains are taxed at 15% if the amount is withdrawn before one year.

• The Expertise of Fund Manager

  The success of an investment in a focused mutual fund depends on the skills and knowledge of the fund manager. They have to research well and have an expert screening process to be able to pick out the best-performing stocks to ensure high returns.

  At the same time, working with the fund manager to discover the top holding of the fund, the filters and understanding the history of the focused funds can also help.

• Financial Objectives

  Those seeking to invest for a short period may not benefit from focused fund investment. It is because the investment has to be for 5 to 7 years to help maximise returns. Another factor is the choice of mid-cap or large-cap funds as it should depend on your investment purpose.

• Risk Considerations

  The limit on the number of stocks invested also poses high risks. Market downfall may affect focused fund investment, and hence, you should invest if you have a high-risk tolerance.

The Bottom Line On Investing In Focused Funds

It may be tempting to invest in focused mutual funds because of the probability of high returns and limited stock choices. But, there are also other factors you need to consider before investing. Make sure you choose a fund wisely based on your risk profile and financial objectives. Read and understand all the risks associated with the fund before making a decision.