What are focused funds?
Over the years, Focused funds have gained attention for their distinct approach to portfolio construction. This article explores what focused funds are, their advantages and disadvantages, and discusses the ideal investor profile for these funds.
Focused funds definition
Focused funds belong to the category of equity mutual funds and are characterised by their concentrated portfolio approach. Unlike diversified funds that hold a wide range of stocks across various sectors, focused funds limit their investments to a select number of stocks, typically ranging from 20 to 30, with 30 being the maximum that is permitted. The primary objective is to create a focused portfolio of high-conviction stocks, allowing fund managers to capitalise on the potential of these select companies.
Advantages of focused funds
High conviction stocks: Focused funds invest in a limited number of stocks, typically those that the fund manager has high conviction in. This can lead to a portfolio comprising companies with strong growth potential and solid fundamentals.
Potential for better returns: The concentrated nature of the portfolio allows for a more significant impact on the performance of individual stocks. If the selected stocks perform well, the fund has the potential to generate relatively better returns compared to more diversified funds.
Active management: Focused funds demand active management as fund managers constantly evaluate and adjust the portfolio based on market conditions and the performance of the selected stocks.
Disadvantages of focused funds
High risk: The concentrated nature of focused funds exposes investors to higher risk. If one or more of the selected stocks underperform, it can significantly impact the overall performance of the fund.
Market dependency: Focused funds' success is highly dependent on the fund manager's ability to accurately identify high-performing stocks and the right market opportunities.
Less diversification: The limited number of stocks in the portfolio means less diversification. In the event of poor performance by the selected stocks, there are fewer alternative investments to offset losses.
Who should invest in focused funds?
Experienced investors: Focused funds are suitable for investors with a good understanding of the market and a higher risk tolerance. Due to the concentrated nature of the portfolio, investors need to be comfortable with the potential for higher volatility.
Long-term investors: Investors with a long-term investment horizon may find focused funds appealing. The concentrated approach may take time to yield results, and long-term investors can ride out short-term market fluctuations.
Risk-taking investors: Individuals willing to take on a higher level of risk in pursuit of potentially better returns may consider allocating a portion of their portfolio to focused funds.
Conclusion
Focused funds offer a unique investment strategy that depends on the concentration of high-conviction stocks in a limited portfolio in terms of number of stocks held. While these funds present the potential for higher returns, they come with increased risk and volatility. Therefore, investors should carefully assess their risk tolerance and investment goals before investing in focused funds.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.