Focused Equity Fund: Meaning, Types & Benefits

Because of its diversity and adaptability for various investors, investing in mutual funds is a sensible option. Since not all mutual funds are created equal, investors must understand the differences between them in order to make an educated selection.

What are Focused Funds and How Do They Work?

A focused equity fund is a mutual fund that engages in a limited pool of firms. SEBI allows focused funds to invest in as little as 30 shares. As a result, the term “focused fund” refers to an investment that focuses on no more than 30 companies.

Because other mutual funds may invest in up to 100 equities, it is the only one with such a restriction. A focused fund could invest in large-cap, mid-cap, or small-cap stocks. They do not invest in a big number of equities and instead concentrate on a few industries. A focused equity fund’s principal goal is to achieve maximum returns by investing in high-performing assets.

Benefits and Drawbacks of Focused Equity Funds

Before you invest in any mutual funds, it’s a good idea to understand why they function and what dangers they may include. Here are some of the advantages and hazards of specialized funds:

Pros:

A Screening Process That Is Investor-Friendly

Because focused equity funds invest in just around 30 companies, they adopt a systematic approach. Stocks are chosen by the fund management only after a rigorous, tough screening procedure and considerable study. It implies there will be less space for trial and error, and they will only buy equities after a thorough analysis. The system works in investors’ favor. As a result, the major goal of a focused equity fund is to strike the bull’s eye by selecting the proper companies with the potential for large returns.

Concentrating on a Few Stocks Is Beneficial

Diversification is one of the finest features of mutual funds. It aids in the reduction of hazards while also increasing profits. Limited returns are a disadvantage of investing across industries and stocks. Because focused funds invest solely in highly studied equities and are confined to just a few, large returns may be attainable.

Cons

The primary drawback is that investing in just a few companies may lead to either success or failure. As a result, there is a chance of increased risk as well as bigger rewards. A considerable risk is also posed by a lack of diversity. As a result, focused funds are quite volatile.

Who Should Invest in Focused Funds?

Experienced investors will benefit from a focused equity fund investment more than novice ones. The former has a high risk appetite, which is important for focused funds. It’s also appropriate for people with a five- to seven-year time horizon. Because focused equities mutual funds are considered high-volatile, consumers seeking a secure investment should look at other mutual fund choices.

Types of Focused Equity Funds in India

In India, focused equity funds are a type of mutual fund scheme that typically invests in a limited number of stocks, usually between 20 and 30, with the aim of achieving higher returns by concentrating investments in a select few high-conviction stocks. Here are some common types of focused equity funds in India:

Large-cap-focused equity funds: These funds primarily invest in large-cap stocks, which are companies with a large market capitalisation. Large-cap-focused funds aim to provide stable returns over the long term by investing in well-established and financially stable companies.
Mid-cap-focused equity funds: Mid-cap-focused funds invest in mid-sized companies, which typically have higher growth potential compared to large-cap companies but also come with higher risk. These funds focus on capturing the growth potential of mid-cap stocks while managing the associated risks.
Multi-cap focused equity funds: Multi-cap focused funds have the flexibility to invest across companies of various market capitalisations, including large-cap, mid-cap, and sometimes small-cap stocks. The allocation to each market cap segment may vary based on the fund manager’s outlook and investment strategy.
Sector-specific focused equity funds: These funds concentrate their investments in stocks belonging to a specific sector or industry, such as banking, pharmaceuticals, technology, or infrastructure. Sector-specific focused funds allow investors to gain exposure to a particular sector they believe will outperform the broader market.
Thematic focused equity funds: Thematic funds invest in companies that are aligned with a specific theme or trend, such as ESG (Environmental, Social, and Governance), digitalisation, consumption, or healthcare innovation. These funds aim to capitalise on emerging trends and disruptors shaping the future economy.
Value-focused equity funds: Value-focused funds primarily invest in stocks that are considered undervalued relative to their intrinsic worth. The fund manager looks for companies trading at a discount to their intrinsic value, often based on fundamental analysis metrics such as price-to-earnings ratio, price-to-book ratio, and dividend yield.
Growth-focused equity funds: Growth-focused funds invest in companies expected to grow at an above-average rate compared to the overall market. These funds typically target companies with strong earnings growth potential, high revenue growth rates, and innovative business models.

Types of Focused Equity Funds

Sector-specific focused equity funds: Industry-specific equity funds target one part of the economy, like finance, tech, or health. They invest in the belief that a particular sector will grow.

For instance, if you think finance will boom soon, you can choose a fund that invests in banking and financial services to benefit from this potential increase.

Theme-specific focused equity funds: Equity funds based on themes put money into areas driven by certain trends or concepts, such as green energy or online shopping. These funds are designed to invest in sectors expected to rise over time.

Take green energy as an example: if you believe it will be big, you can invest in a fund that focuses on companies across various industries that are innovating with green energy.

Multi-cap focused equity funds: Diverse equity funds spread investments across all sizes of companies, from the giants to the up-and-comers. Managers of these funds pick a handful of companies they believe will outperform and focus their investments there.

Important Considerations Before Investing In Focused Funds

Implications for Taxes

Focused funds are taxed as equity funds since they are equity-oriented. Long-Term Capital Profits, or LTCG, are taxed at 10% on gains above Rs. 1 lakh in a calendar year. Short-Term Capital Gains, or STCG, are taxed at 15% if the money is taken out before a year has passed.

Fund Manager’s Expertise

The fund manager’s abilities and expertise are critical to the success of a targeted mutual fund investment. To assure strong returns, they must do thorough research and use an experienced screening procedure to choose the best-performing companies. Working with the fund management to understand the fund’s top holdings, the filters employed, and the history of the focused funds may also be beneficial.

Monetary Objectives

Those looking to invest for a short period of time may not profit from investing in a specialized fund. It’s because, in order to maximize profits, the investment must be made over a period of 5 to 7 years. The choice of mid-cap or large-cap funds, which should be based on your investing objective, is another element that aligns with your financial aim.

Risks to Consider

The restriction on the number of stocks that may be invested is likewise fraught with danger. If you have a high risk tolerance, you should invest in targeted funds in the event of a market downturn.

How To Invest in Focused Equity Funds?

Investing in Focused Equity Funds can be easily done through your Angel One account. Just follow these simple steps:

Step 1: Access your Angel One account using your registered mobile number, complete the OTP validation, and input your MPIN. If you don’t have a Demat account with Angel One, you can easily open one by completing the KYC procedure and submitting the required documents.

Step 2: Identify the most suitable mutual fund based on your financial goals and risk tolerance. Explore the mutual fund options available on the Angel One app, considering the following factors:

Search for your desired fund or take recommendations from Angel One’s curated list.
Analyse the fund’s historical performance, tax implications, sectors and stocks it comprises, and potential returns using the provided calculator.
Assess the fund’s risk level and align it with your own risk tolerance.
Take into account the fund’s ratings from reputable rating agencies, typically on a scale from 1 to 5.
Examine the fund’s expense ratio to gauge the cost associated with your investment.

Step 3: Once you’ve made your fund selection, log in to your Angel One account, navigate to the Mutual Funds section, and locate the chosen fund(s). As this might be a long-term investment, exercise caution during this phase:

Decide whether you want to invest a lump sum or opt for a monthly SIP (Systematic Investment Plan).
Specify the amount you wish to invest and choose your preferred payment method, with UPI being the recommended option. Alternatively, you can use net banking.
For SIP investments, set up a mandate for convenient future contributions.

Wrapping Up

Because of the possibility of large returns and limited stock options, it may be appealing to invest in focused equity funds. However, there are a number of additional variables to consider before making a purchase. Make sure you choose the right fund for your risk profile and financial goals. Before making a selection, read and understand all of the risks connected with the investment.

FAQs

Is it good to invest in a focused equity fund?

Investing in a focused equity fund can be beneficial if you’re seeking potentially higher returns by concentrating on a limited number of stocks. However, this approach carries higher risks, so it’s important to consider if it aligns with your risk tolerance and investment goals.