A Beginners Guide to focused Funds

While most investors agree that diversifying their mutual fund investments will reduce the overall unsystematic risks during investments, some prefer to earn better returns through focused mutual funds.

Wondering what focused mutual funds are and how these funds can help you get better returns on your investments?

Don't worry! Here's a detailed guide to focused fund meaning, how they work, and how they can bring in high returns for you on your investments.

What are focused mutual funds?

A focused mutual fund is an equity fund wherein investors invest their capital in a small number of stocks (up to 30 stocks as per SEBI guidelines) of a few companies. These funds are sometimes referred to as "best idea funds" because the fund managers only choose a limited number of companies to invest in.

Instead of spreading your investment across many different types of stocks, a focused mutual fund puts all its attention on just a few sectors. These funds aim to find the best-performing stocks that can give you the highest returns.

Wondering how investing in limited stocks in specific companies of a given sector can help you get better returns? Let’s take a look at how these mutual funds work in the first place.

How do they work

Now that you know the focused fund meaning, it is time to understand how it works.

Even though the SEBI allows investing in only up to 30 stocks at a time, these stocks are usually in high-conviction bets. Simply put, the stocks are in companies that can have a high probability of giving good returns in the near future. Additionally, the risks involved in investing limited stocks in a few companies are mitigated by investing in stocks across Large-cap, small-cap and mid-cap segments of a particular sector.

Additional Read: How to Choose Mutual Funds for Beginners?

Advantages of focused mutual funds

Investing in focused equity funds offers various advantages to investors. Here are a few reasons to invest in focused mutual funds.

#1 High returns

A focused mutual fund puts capital in only a few select companies of a particular sector that guarantee high returns in the future. This increases the probability of better returns across all bets. In fact, the returns on focused mutual funds are usually higher than diversified equity funds too, given the stocks are not spread out over a large market to minimize the risk of losses.

Furthermore, a focused investment strategy of focused equity funds, which is supported by extensive research, has the potential to deliver returns that outperform the broader stock market.

#2 Diversification of funds across company sizes

Focused mutual funds may involve investing in a few sectors and in selected companies. But portfolio diversification to minimize market risks is possible here too. How? Well, investors have the freedom to invest in mid-cap, small-cap and large-cap companies. They can also split their stocks across companies from all segments as they wish. This lowers the risk of losses posed due to the changing market conditions.

#3 Investor-friendly screening

Since the stocks available for investing are limited, managers handpick companies to invest in after a in-depth analysis to ensure they perform well. This ensures you get better returns on your investments.

#4 Clear sectoral and stock segregation

Focused equity funds are a type of equity mutual fund that invests in a limited number of stocks and are highly concentrated in a specific sector or group of sectors. Unlike other types of equity funds, focused equity funds tend to have a more defined and narrow investment strategy, resulting in a clear segregation of sectors and stocks within the portfolio.

This focused approach often involves a higher degree of risk, as the fund's performance is highly dependent on the performance of the specific sectors and stocks it invests in. However, this risk can also lead to higher returns if the selected sectors and stocks perform well.

Who is a focused mutual fund for?

Given their caveats, focused mutual funds are not for every kind of investor. Here are some types of investors who could make use of these funds.

#1 Investor who can tolerate investment risks

Focused mutual funds can be risky investments given capital invested in a few stocks of selected companies, that too based on the intuition of the fund manager. So, there is scope for losses. If you’re an investor newbie or want more security while investing, avoid investing in focused mutual funds.

#2 Investors with a longer investment horizon

Focused equity funds are medium to long-term investments. So investors who are willing to wait over five years to see results should invest in them.

Additional Read: Important Tips to Pick Top-Trending Mutual Funds

Things to remember before getting a focused mutual fund

#1 Being equity funds, the gains are taxed at standard rates for long-term and short-term capital gains.

#2 Get a skilled fund manager before investing in equity funds to ensure you invest in high-performing stocks.

#3 Tailor your focused fund investment portfolio according to your needs and financial goals.

#4 Be aware of the risks involved before investing in a focused mutual fund.

Final word

Focused funds are excellent long-term investment options for investors who want high returns and are willing to take significant risks. However, to make the most out of these investments, investors should have a reliable fund manager and have a clear idea of their business objectives.

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