Focused funds can be seen as the opposite of diversified mutual funds. There are many exciting categories and types of mutual funds to discover in the mutual funds universe.
Let us learn more about focused funds in this blog.
What Are Focused Funds?
Focused funds are a category of equity mutual funds that invest in a concentrated portfolio of a limited number of stocks. According to SEBI (Securities and Exchange Board of India) regulations, focused funds can hold a maximum of 30 stocks in their portfolio. These funds can invest across market capitalizations (large-cap, mid-cap, and small-cap) and sectors, providing fund managers the flexibility to choose high-conviction bets.
How Focused Funds Differ from Diversified Funds
The primary difference between focused funds and diversified funds lies in the number of stocks held in the portfolio:
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Focused funds require skilled fund management as the limited number of stocks means that every stock plays a crucial role in the overall portfolio’s performance.
Risk and Return Profile of Focused Funds
Risk Factors
1. Higher Market Volatility
Since the portfolio consists of fewer stocks, any negative movement in one stock can significantly impact the overall returns.
2. Stock-Specific Risk
Unlike diversified funds that spread investments across a wide range of stocks, focused funds rely heavily on a few stocks, increasing the stock-specific risk.
3. Sectoral Risk
If a focused fund has a high allocation to specific sectors (like banking or IT), it can be more vulnerable to sectoral downturns.
4. Fund Manager Dependence
Performance is highly dependent on the expertise and decision-making of the fund manager.
Return Potential
1. Higher Returns
If the selected stocks perform well, focused funds can generate superior returns compared to diversified funds.
2. Outperformance in Bull Markets
Focused funds tend to do well in bullish markets as high-conviction stocks rally strongly.
3. Volatility in Bear Markets
These funds can experience sharp declines when market conditions are unfavorable.
Top Performing Focused Funds in India
Top 10 Focused Funds Based on 1-Year Return
This table lists the top-performing focused funds based on their 1-year return. Invesco India Focused Growth Direct Plan leads with a return of 13.73%, followed closely by HDFC Focused 30 Growth Direct Plan at 12.94%. The table also includes each fund’s Total Expense Ratio (TER), which indicates the cost of managing the fund, and the Asset Management Company (AMC) managing the fund.
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Source: Kuvera, 27 Feb, 2025
Top 10 Focused Funds Based on 3-Year Return
The following table ranks the top focused funds based on 3-year returns. HDFC Focused 30 Growth Direct Plan is the top performer with 25.07%, followed by Invesco India Focused Growth Direct Plan at 20.85%. The TER (Total Expense Ratio) values indicate the cost efficiency of managing these funds, which can impact net investor returns over the long term.
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Source: Kuvera, 27 Feb, 2025
Who Should Invest in Focused Funds?
Focused funds can be better for investors who possess the following:
- Have a high-risk tolerance and can handle market fluctuations.
- Are looking for long-term capital appreciation and can stay invested for 5+ years.
- Believe in the ability of a fund manager to select high-quality stocks.
- Want to take concentrated bets on a few selected stocks.
Who Should Avoid?
- Conservative investors looking for stability and consistent returns.
- Those who prefer low volatility and broader diversification.
- Investors with short-term investment horizons.
Wrapping Up
Focused funds can be a rewarding investment avenue for those who can stomach the volatility and believe in the expertise of fund managers. While they offer the potential for high returns, investors should carefully assess their risk appetite before committing to these funds. Conducting periodic reviews and selecting funds with a strong track record can help optimise returns while managing risks effectively.
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