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Focused funds: When a focused investment play pays off

Most focused funds go for a multi-cap approach with most of the investment in large-cap stocks

There is no restriction in terms of market capitalisation and the fund manager has flexibility to manage the fund based on his market outlook.

As selecting right stocks is the key for generating higher returns in the long-term, investors are looking at focused funds of mutual funds. These funds invest in high-performing stocks and the fund manager’s strategy is very crucial, especially in times of high market volatility.

Focused funds, according to Securities and Exchange Board of India’s categorisation norms, can invest in a maximum of 30 stocks and state its focus area—large-cap, multi-cap, mid-cap or small-cap. There is no restriction in terms of market capitalisation and the fund manager has flexibility to manage the fund based on his market outlook. As on August 31, there are 23 focused funds with net assets under management of Rs 53,097 crore.

High conviction ideas

As focused funds are all about taking concentrated bets across sectors and themes by the fund manager, higher returns can be made depending on the selections of stocks. So, investors who are convinced with the fund manager’s stock picking ability and have a high-risk appetite should invest in such funds. As these funds run concentrated portfolios, investors should be aware of concentration risk. The average exposure to the top 10 stocks in the focused category is around 59% as against 47% for multi-cap funds.

Sameer Kaul, CEO and MD, TrustPlutus Wealth Managers (India), says these funds give a flavour of Portfolio Management Services to investors’ portfolio. “These target high conviction ideas and invest in a concentrated manner. Given that the recent market rally has been quite narrow in terms of stock participation, focused funds with concentrated portfolios may be better placed than diversified funds to benefit from this up move,” he says.

Harshad Chetanwala, co-founder, MyWealthGrowth, says flexibility to invest across market capitalisation gives an advantage. “The portfolio of focused funds will have 20-30 companies as the fund manager invests in the companies with a lot of conviction. A few focused funds have done very well over the last few years and are performing consistently among equity diversified funds,” he says.

Multi-cap approach

Most focused funds go for a multi-cap approach with most of the investment in large-cap stocks. Brijesh Damodaran, managing partner, BellWether Advisors LLP, says focused funds by the very definition invests in select stocks and has allocation mostly into large-cap. ”With the benchmark being Nifty50, allocation is more towards large-cap and investors, too, are more comfortable with large-cap stocks. Large-cap stocks can underperform for certain time periods and give higher returns over a longer period of investment. Investors need to stay invested for over five years and look at their asset allocation before investing in focused funds,” he says.

Last year, when few stocks contributed to the market rally, focused funds outperformed multi-cap and large-cap categories. Kaul says that investors should not invest in focused funds with a short term investment horizon. “Investors should select funds that do not invest in illiquid or highly volatile names and are not biased towards mid-small cap stocks. Investors should not get jittery by the interim volatility of these funds,” he says.

As the number of stocks are limited in focused funds, these funds benefit from a broad-based rally as they may have higher allocation in these stocks. “These funds do have high risk because of concentrated portfolios, but offer focused portfolios to investors built with strong conviction. Based on the fund’s allocation across market capitalisation one can select the focused fund to invest,” says Chetanwala.

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