Focused funds provide investors with an opportunity to invest in a concentrated portfolio of high-conviction stocks having the potential for strong returns.
Unlike diversified equity mutual funds, which typically hold around 50-80 stocks, focused funds can invest in a maximum of 30 stocks at any given time.
The relatively limited number of stocks allows fund managers to concentrate their investments in companies they have high conviction in, particularly those with strong growth potential.
Since a portfolio’s performance over time is often significantly influenced by a few top holdings, investing a larger proportion in high-conviction stocks can allow these investments to have a greater impact on overall portfolio returns.
Stocks outside the top holdings may also generate gains, but their lower allocation generally means they contribute less to the portfolio’s overall performance.
In this editorial, we look at four focused funds that delivered over 16% XIRR on SIP investments in 10 years.
#1 ICICI Pru Focused Fund
ICICI Pru Focused Fund was initially launched as a Large Cap Fund in May 2009 but was re-categorised as a Focused Fund in 2018.
Although the fund has the flexibility to invest across large-cap, mid-cap, and small-cap stocks, its portfolio remains predominantly focused on large caps.
The fund aims to identify fundamentally sound companies with robust balance sheets, high-quality sustainable cash flows, and low leverage.
This small-cap company runs one of the most complex business services platforms in the country, built and refined over one and a half decade.
It is undergoing an evolution, and is not the same company it was 5 years ago. The strong cash flow generation from its core business is being deployed to grow its AI offerings.
In fact it happens to be the market leader with this offering in its core industry. Considering the potential adjacencies, the opportunity here stands at Rs 80 billion.
The management is guiding for a healthy double digit growth with over 20% margins. At current valuations, we believe it is one of the most mispriced opportunities in the market.
A monthly SIP of Rs 10,000 over a 10-year period, meaning a total investment of Rs 1.2 m, in ICICI Pru Focused Fund would have now grown to Rs 2.96 m.
This translates into an XIRR of 17.2%.
Its top stock holdings are ICICI Bank, Axis Bank, Mphasis, HDFC Bank, and TVS Motor Company.
It invested 61.1% in large caps, 33.1% in mid caps, and 2.7% in small caps.
#2 HDFC Focused Fund
HDFC Focused 30 Fund is the former HDFC Core & Satellite Fund, which was originally launched in September 2004.
The fund seeks attractive primarily in the large cap space, prioritising fundamentally strong companies having competitive advantage.
It emphasises on valuation to provide a reasonable margin of safety and follows a buy-and-approach to select stocks with a long-term view.
A monthly SIP of Rs 10,000 over a 10-year period, meaning a total investment of Rs 1.2 m, in HDFC Focused Fund would have now grown to Rs 2.89 m.
This translates into an XIRR of 16.8%.
Its top stock holdings are ICICI Bank, HDFC Bank, Axis Bank, Kotak Mahindra Bank, and SBI.
It invested 74.4% in large caps, 13.6% in mid caps, and 7.7% in small caps.
#3 Quant Focused Fund
Quant Focused Fund, launched in August 2008, is a Focused Fund with a bias towards large-cap stocks.
Quant Focused Fund selects stocks by using its proprietary VLRT framework, which assesses Valuations, Liquidity, Risk, and Timing of investments.
It invests in a compact portfolio of 15-20 stocks with some exposure to Derivatives and non-equity instruments for managing risks.
A monthly SIP of Rs 10,000 over a 10-year period, meaning a total investment of Rs 1.2 m, in Quant Focused Fund would have now grown to Rs 2.84 m.
This translates into an XIRR of 16.5%.
Its top stock holdings are ICICI Pru AMC, Adani Energy Solutions, Adani Enterprises, Adani Green Energy, and LG Electronics India.
It invested 57.1% in large caps, 7.5% in mid caps, and 9.2% in small caps.
#4 360 One Focused Fund
Launched in October 2014, 360 ONE Focused Equity Fund is the erstwhile IIFL Focused Equity Fund.
It follows a multi-cap investment strategy, emphasising large-cap stocks while maintaining substantial exposure across lower market cap segments.
The fund then takes focused positions in sectors expected to perform well, selecting growth-oriented companies with favourable risk-reward ratios.
A monthly SIP of Rs 10,000 over a 10-year period, meaning a total investment of Rs 1.2 m, in 360 One Focused Fund would have now grown to Rs 2.82 m.
This translates into an XIRR of 16.3%.
Its top stock holdings are ICICI Bank, Eternal, Tata Motors, Axis Bank, and Indus Towers.
It invested 62.1% in large caps, 14.8% in mid caps, and 18.4% in small caps.
Conclusion
The concentrated approach of Focused Funds gives fund managers greater flexibility to allocate meaningfully to a limited number of high-conviction stocks having strong growth potential.
However, the concentrated nature of these funds also makes them relatively high-risk, high-return investments.
They are therefore more suitable for aggressive investors with a long-term investment horizon of at least five years.
Focused Funds may also be considered as part of the satellite portion of a portfolio for tactical allocation aimed at enhancing overall portfolio returns.
Investors seeking comparatively greater stability may consider a large-cap-oriented focused fund, while those willing to take higher risk in pursuit of potentially higher returns may consider a multi-cap-oriented focused fund.
Happy investing.
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here…
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