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Mutual funds are among the most preferred investments for numerous reasons, like diversification, tax benefits, and professional risk management. Among the many types available, focused funds are a kind of mutual fund that have a highly concentrated portfolio.

What are Focused Funds?

A focused fund is a type of equity-based fund with a small number of identical stocks. The investment strategy of these funds focuses on a limited variation from a few sectors instead of diversifying the fund structure. 

 

Generally, these funds hold no more than 30 stocks, while other mutual funds can hold positions in over 100 companies at a time. Because of their investment mandate of choosing a few stocks, they are also called the ‘best idea funds.’

 

The primary objective of these funds is to deliver optimal returns by investing only in high-performing funds. 

Types of Focused Funds

Based on the nature of the investment, these funds can be categorised into the following types:

  • Equity-Focused MFs: This type of focused MF concentrates investment toward equity stocks

  • Sector-Focused MFs: These funds invest in a particular sector, like banking, healthcare, or information technology 

  • Theme-Focused MFs: These invest the money in a certain theme, such as environment or consumption

How Do Focused Funds Work?

While most equity-based mutual funds invest in around 50-100 stocks, focused mutual funds cannot invest in more than 30 stocks. In other words, they follow a concentrated portfolio approach, where they invest in a limited number of high-performing stocks. 

 

In addition, the investment mandate of these funds does not have a market capitalisation or sectoral bias. This means they can invest in any company, irrespective of the market capitalisation and the sector they belong to. Hence, you could categorise them as flexi-cap funds. 

Pros of Focused Funds

Here are some of the benefits you can enjoy by investing in focused funds:

  • Potential for Higher Returns

These funds invest in limited stocks that are high-performing. While this can be a risky investment approach, there is a probability that you can earn higher yields than most other types of mutual funds.

  • Active Fund Management

To take advantage of market opportunities, fund managers actively manage these funds. In other words, they constantly monitor and adjust the portfolio as per the changing market performance.

Cons of Focused Funds

Here are some drawbacks of focused funds that you should know: 

  • Concentrated Portfolio

These funds have a concentrated portfolio, which means they only invest in a limited number of stocks from a particular sector or theme. This investment strategy makes them more susceptible to market risks.

  • Highly Volatile

The lack of diversification also makes these funds quite risky, and thus, their performance is highly volatile.

Things to Consider Before Investing in Focused Funds

When investing in a focused fund, you must take into account the following factors:

  • Age

Since these funds carry higher risks, they may be more suitable for young investors and not for those nearing their retirement age.

  • Investment Objective

These funds are suitable if you wish to invest for long-term financial goals. For instance, you can consider this mutual fund scheme if you wish to build a corpus for your child’s higher education, their marriage, or your retirement.

  • Investment Horizon

Experts believe that these funds provide optimal returns if you stay invested in these funds for a medium-to-long term. Hence, assess the investment horizon before you invest.

  • Risk Appetite

As mentioned above, these funds have higher risk factors associated with them. Thus, you must also consider your risk appetite before investing in them.

  • Fund Management

Since it is an actively managed fund and the management will impact your returns, it is essential to consider the expertise and performance of fund managers.

Who Should Invest in Focused Funds?

These funds are primarily suitable for investors who have a higher risk appetite. Since it carries higher risks, it is not advisable for investors nearing their retirement, who are looking to invest their savings.

 

Moreover, these funds are more apt for experienced investors and not for beginners. Lastly, investing in these funds is generally beneficial if you stay invested for at least a 5-year period.

 

In conclusion, a focused mutual fund allows you to diversify your investment portfolio and earn optimal returns. On Bajaj Markets, choose from different mutual funds and start investing online in just a few simple steps.

FAQs on Focused Fund

What is the difference between focused mutual funds and diversified equity funds?

The diversified equity funds invest in several stocks across numerous sectors, increasing equity exposure to reduce the associated risk. On the other hand, focused MFs seek to provide higher returns with limited exposure to multiple equities.

Can I invest in focused MFs through the SIP route?

Yes, you can invest in the focused funds through the Systematic Investment Plan (SIP) option.

Do focused funds have a lock-in period?

No, there is no lock-in period for focused MFs. However, the ideal investment horizon for these funds is between 5 and 7 years. Hence, you must consider this factor before investing.

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