Focused Funds

About Focused Mutual Funds

Focused funds are a type of equity mutual fund investment that allows investors to get exposure to a small number of stocks. Unlike general equity funds, focused funds can invest in up to 30 stocks at a time. A focused fund can be a large-cap, mid-cap, small-cap or multi-cap fund, depending on the investment strategy. However, the fund is spread across a limited number of stocks or sectors, with an investment strategy betting on the growth of those few stocks and sectors. These funds function like any equity mutual fund, with additional focus given to a growing sector/theme. Hence, these are also called the best idea funds. The fund allocation involves investing at least 65% in equities and the rest in debt securities to generate balanced returns.

How Do Focused Funds Work?

Focused mutual funds employ a distinct investment approach by concentrating their holdings in a limited number of stocks, typically no more than 30. This strategy involves creating a concentrated portfolio with selective stock bets, contrasting with the more diversified approach of traditional equity mutual funds, which often hold between 50 and 100 stocks. The specific number of stocks held in a focused fund can vary based on the fund's investment objectives. Furthermore, focused funds have considerable flexibility regarding where they invest. They are not bound by restrictions on sectors or market capitalisations, enabling them to invest in companies across the spectrum. This means that a focused mutual fund can allocate its capital to large-cap, mid-cap, and small-cap stocks without being constrained by predefined limits. Essentially, these funds resemble multi-cap mutual funds but with a more focused selection of stocks, granting fund managers the autonomy to determine the allocation of assets among companies of various sizes and sectors.

Features of Focused Funds

• Focused funds are open-ended mutual funds that invest in a limited number of high-quality securities to offer better returns to investors. While equity mutual funds can invest in a portfolio containing 100 securities, most focused funds limit exposure to 20-30 assets, which helps the fund managers to optimise returns on the fund.
• The concentrated investment strategy makes these funds highly volatile and suitable mostly for experienced investors with a higher risk appetite.
• Concentration isn’t always a bad approach. In fact, these funds strive for optimal diversification with stocks, sectors, and market caps. As a result, they are capable of generating better risk-adjusted returns. The low number of stocks means less stocks to track and adjust for and greater resources for researching each stock.
• The performance analysis of these funds shows that focused funds are better performers than large and multi-cap funds over a period of 10 years. These funds grew at a CAGR of 18.2% compared to large-cap (15.6%) and multi-cap (17.8%) during the same timeframe.

Advantages of Investing in Focused Funds

The following are the major advantages of focused mutual fund investment.

1. The benefit of well-researched investment: Focused funds offer curated investments where each security in the portfolio is selected after careful research to provide maximum returns.
2. Higher returns than average: Concentrating investment on high-performing assets results in higher returns. Unlike other funds, focused funds concentrate on selected securities that help investors optimise gains more effectively.  
3. Minimises risk with selected diversification: Careful selection of stocks minimises risks through thorough filtration of stocks. It helps investors diversify into selected segments and limits the drawbacks arising from investing across sectors.

Risk Involved in Focused Funds

The risks associated with focused funds are pretty much the same as those associated with any equity fund. This means they run the risk of their stock investments losing value due to a fall in share prices. However, in addition to the market risks, there are some additional risks to investing in focused equity funds that investors should know about. 

1. Focused funds are usually volatile - In the search for greater returns, fund managers may often end up investing in a small set of volatile stocks. The concentrated approach offers reduced chances of mitigating the underperformance of just one asset or one sector by the performance of another.  
2. Lack of diversification - Although the stocks included in a scheme are highly researched, focused funds can either be a hit or a miss depending on the performance of only a few underlying securities. Lack of diversification increases the weight of each stock in the fund, which adds to the risk factor. 

Factors To Consider Before Investing in Focused Funds

When contemplating investments in focused funds, it's essential to weigh several key factors before diving in:

1. Investment Horizon: Determine your investment timeframe. Focused funds are often better suited for long-term goals, as they may be subject to short-term volatility.
2. Risk Tolerance: Assess your risk tolerance carefully. Focused funds tend to be more concentrated in a limited number of stocks, which can amplify risks.
3. Fund Manager Expertise: Research the fund manager's track record and expertise in managing focused portfolios. Their skills can significantly impact returns.
4. Portfolio Concentration: Understand the fund's concentration in specific sectors or stocks. Ensure it aligns with your investment objectives and risk appetite.
5. Expense Ratio: Consider the fund's expense ratio, as it affects your overall returns. Lower expenses can enhance long-term gains.

By carefully assessing these factors, you can make informed decisions when investing in focused funds, aligning your choices with your financial goals and risk tolerance.

Who Should Invest in Focused Funds?

Focused funds invest in select stocks. Although hand-picked, limited diversification is responsible for increasing the fund’s volatility. Keeping these in mind, focused funds are usually recommended to seasoned investors with a higher appetite for risk. Focused mutual funds suit the portfolios of investors looking for a higher profit with a moderate to long-term investment horizon. These are for investors looking for higher capital appreciation in the long run by investing in a concentrated portfolio. Aggressive investors will take higher risks for higher returns by investing in a small number of securities. Focused funds invest in a smaller number of securities that are correlated. Despite higher volatility, these funds can bring higher returns for investors who invest for 3-4 years.

Taxability of Focused Funds

The taxation of these funds is similar to the tax implications of mutual funds. Focused funds are treated like equity funds, and the tax is applied for long and short-term gains.  The capital gains from investment of less than 12 months are considered short-term gains and are taxed at a 15% rate.  If the capital gain is realised after 12 months, LTCG with a rate of 10% will apply after the standard deduction of ₹1 lakh each year. A simple way to calculate capital gain is to deduct the redemption value from the initial investment amount.  Focused funds are considered higher risk because of the concentrated investment approach. If the selected stocks don’t perform, there are no options to mitigate one underperforming asset with another. Dividend taxation - The dividend income is added to the investor’s taxable income and taxed as per their slab. There is also a 10% TDS charged by the mutual fund house on a dividend amount exceeding ₹5,000 in a financial year.

How to Invest in Focused Funds?

Investing in Focused Funds is a straightforward process through your Angel One account. Here's how you can do it: Step 1: Log in to your Angel One account using your registered mobile number. Validate the OTP and enter your MPIN. Note: 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: Choose the right fund based on your financial goals and risk tolerance. You can assess each fund in the mutual fund section of the Angel One app. Consider the following factors:

• Search for the fund you're interested in or explore Angel One's recommended funds across different categories.
• Analyze the fund's historical performance, tax implications, portfolio sectors, and holdings.
• Use the provided calculator to estimate potential returns.
• Evaluate the fund's risk level and ensure it aligns with your risk tolerance.
• Take into account the fund's ratings from reputable rating agencies, typically ranging from 1 to 5.
• Review the fund's expense ratio to understand the associated costs.

Step 3: Once you've decided on the fund(s) you want to invest in, access your Angel One account, navigate to the Mutual Funds section, and locate the chosen fund. As this could be a long-term investment, exercise caution during this phase:

• Decide whether you want to make a lump-sum investment or opt for a monthly SIP (Systematic Investment Plan).
• Enter the investment amount and select your preferred payment method. UPI is the recommended choice, but you can also use net banking.
• If you're opting for the SIP route, you can set up a mandate for hassle-free future contributions.

Top 10 Focused Funds

ICICI Pru Focused Equity Fund

ICICI Pru Focused Equity Fund is managed by Vaibhav Dusad and Sharmila D’mello and was launched on 28 May 2009. It is benchmarked against the BSE 500 India Total Return Index (TRI). The main objective of the scheme is to achieve long-term capital growth by investing in a focused portfolio of equity and equity-related securities of up to 30 companies across different market capitalisations, following a multicap approach. It has an expense ratio of 0.59%, indicating relatively moderate fund management costs.

Invesco India Focused Fund

Invesco India Focused Fund is managed by Taher Badshah and Hiten Jain and was launched on 29 September 2020. It is benchmarked against the BSE 500 India Total Return Index (TRI). The scheme aims to achieve capital appreciation by investing in a concentrated portfolio of up to 20 stocks across different market capitalisations. It carries a lower expense ratio of 0.56%, making it comparatively cost-efficient for investors. 
 

HDFC Focused Fund

HDFC Focused Fund is managed by Amit Ganatra and Dhruv Muchhal and was launched on 17 September 2004. It tracks the Nifty 500 Total Return Index (TRI) as its benchmark. The scheme seeks to deliver long-term capital appreciation and income by investing in equity and equity-related instruments of up to 30 companies. It has an expense ratio of 0.61%, which is slightly higher than some peers but still reasonable.

Mahindra Manulife Focused Fund

Mahindra Manulife Focused Fund is managed by Krishna Sanghavi and Fatema Pacha and was launched on 17 November 2020. It uses the Nifty 500 Total Return Index (TRI) as its benchmark. The fund aims to achieve long-term capital growth by investing in a focused portfolio of equity and equity-related securities of up to 30 companies across different market capitalisations. It offers a notably low expense ratio of 0.41%, reflecting efficient cost management. 
 

Bandhan Focused Fund

Bandhan Focused Fund is managed by Gaurav Satra, Ritika Behera, Kirthi Jain, Manish Gunwani, and Rahul Agarwal, and it was launched on 16 March 2006. The fund is benchmarked against the BSE 500 India Total Return Index. Its objective is to achieve capital appreciation by investing in a focused portfolio of equity and equity-related securities of up to 30 companies. It has an expense ratio of 0.78%, which is on the higher side among focused funds. 
 

SBI Focused Fund

SBI Focused Fund is managed by R. Srinivasan and was launched on 11 October 2004. It is benchmarked against the BSE 500 India Total Return Index. The scheme aims to offer investors long-term capital appreciation by investing in a focused portfolio of equity and equity-related securities, although achieving this objective is not guaranteed. It charges an expense ratio of 0.74%, representing moderate management expenses. 
 

DSP Focused Fund

DSP Focused Fund is managed by Vinit Sambre and Bhavin Gandhi, and it was launched on 1 January 2013. The fund is benchmarked against the Nifty 500 Total Return Index. Its main objective is to achieve long-term capital growth by investing in a concentrated portfolio of up to 30 multi-cap companies through equity and equity-related instruments, including derivatives. The scheme may also allocate a portion of its assets to debt and money market securities for defensive purposes or liquidity management. has an expense ratio of 0.95%, making it one of the higher-cost options in this list.

Kotak Focused Fund

Kotak Focused Fund is managed by Shibani Kurian and was launched on 16 July 2019. It is benchmarked against the Nifty 500 Total Return Index. The scheme aims to generate long-term capital appreciation and income by investing in a concentrated portfolio of equity and equity-related instruments across market capitalisations, covering up to 30 companies. It maintains a relatively low expense ratio of 0.54%, which can benefit long-term returns.

Edelweiss Focused Fund

Edelweiss Focused Fund is managed by Trideep Bhattacharya, Amit Vora, Raj Koradia, and Sumanta Khan, and it was launched on 1 August 2022. The fund is benchmarked against the Nifty 500 Total Return Index. Its objective is to achieve long-term capital appreciation by investing in a concentrated portfolio of equity and equity-related instruments of up to 30 companies, with a focus on the multi-cap segment. It reports an expense ratio of 0.64%, placing it in the mid-range category. Edelweiss Focused Fund. 

Canara Rob Focused Fund

Canara Rob Focused Fund is managed by Shridatta Bhandwaldar and Amit Kadam, and it was launched on 17 May 2021. The fund tracks the BSE 500 Total Return Index as its benchmark. Its objective is to deliver long-term capital appreciation and potential income by investing in a focused portfolio of equity and equity-related instruments across market capitalisations, limited to a maximum of 30 companies. It has an expense ratio of 0.54%, making it one of the more cost-effective funds among peers.