What are Focused Funds?
Focused funds are a subcategory of equity mutual funds that consist of a smaller number of stocks. For this investment scheme, instead of a vast combination of different equity positions, the fund creates a concentrated portfolio with a limited amount of stocks. Due to their mandate to choose a selected number of companies only, these funds are also known as 'best idea funds’.
The main objective of these funds is to generate higher returns through investing in high-performing assets. Since focused funds allocate their assets to a limited number of carefully selected stocks, fund managers of focused funds are generally expected to generate higher returns compared to the returns earned by funds with a portfolio of diverse stocks.
How a Focused Fund Works?
As the name suggests, focused funds invest in a limited number of stocks. These funds aim to maintain a focus on limited stocks having the potential to offer good returns. Unlike other equity funds, focused funds do not offer a well-diversified portfolio of investment. Like generally other equity funds would have around 50-100 stocks in their portfolio, but focused funds can have a maximum of 30 stocks in their portfolio as per SEBI requirements. Focused funds can invest in the companies of any sector or market capitalizations i.e large-cap, mid-cap, or small-cap without any restrictions. We can also say that focused funds are multi-cap funds that have a comparatively lesser number of stocks in their portfolio. The fund managers of focused funds have the freedom to allocate their assets in weights as per their analysis.
Features and Benefits of Focused Funds
- Thoroughly Researched Investments
Since this fund has only a selected number of stocks, extensive research is generally carried out by the fund management team to ensure that the only best companies are chosen. The in-depth analyses of the firms continue to benefit investors to a considerable extent.
2. Financial Objective
Since these funds have a focussed approach, long periods of underperformance cannot be ruled out. Hence, it is not suggested to invest in focused funds if you have a short-term financial objective. It is recommended that the funds must be invested for at least 5 to 7 years in order to get better returns. Focused funds have also outperformed large-cap funds over a longer time span, according to market returns.
3. Nullifying Limitations
It has been a well-known fact in the world of investing that diversification is good for the portfolio. However, over-diversification can be detrimental to the risk-adjusted returns that the portfolio delivers. Since in focused funds, the contribution is confined to selective business stocks, it mitigates the chances of over-diversification.
The taxation of these focused funds is comparable to that of equity mutual funds' tax implications. Long term capital gains (LTCG) higher than Rs.1 lakh are 10% taxable. On the other hand, if they are redeemed before completion of 1 year of investment, short-term capital gains (STCG) are levied at 15 percent.
5. High Returns:
Focused fund doesn’t have a large number of stocks which increases the return potential of the fund. A well-diversified portfolio minimizes the risk and also reduces the return potential of the fund. But, focussed funds have a high return potential as they have few stocks in their portfolio.
Focused funds have a high risk associated with them. As there are fewer stocks in the portfolio, the risk of the portfolio also increases. Equity funds usually have a high risk associated with them, but generally, the fund managers aim to diversify the portfolio to reduce the risks. However, in focused funds, they cannot invest in more than 30 stocks which stops the fund manager to build a well-diversified portfolio.
Focused funds can have exposure to companies across sectors and market capitalizations. The fund managers of focused funds have the freedom & flexibility to invest in the companies of any sector or market capitalizations.
Who should invest in Focused Funds?
Generally, focused equity fund investments are for committed investors and those with a high-risk appetite. Since these funds are known to be more risky, it is better to withdraw from investing in them if investors are searching for safer investment alternatives. Since these funds invest only in a variety of carefully chosen securities, they are much more efficient at providing investors with higher risk adjusted-returns.
How to Invest in Focused Funds Via ZFunds?
There are very easy and simple steps to start investing in the Focused Funds. Follow the below-mentioned steps to start investing:
- Create your free account with ZFunds. If you already have an account with ZFunds, you can simply log in to it.
- To create an account, you will be required to upload your identification documents which can include an Aadhar card, pan card, Voter ID card, driving license, passport, or any other document which is issued by the central or state government.
- You will also be required to upload your address proof.
- After that, you just need to select the best fund which suits you as per your investment horizon and risk.
- And, then at last you just need to choose whether you want to do a lump sum investment or start a sip.
After the successful investment, the units will be allotted and investment will be reflected in 2-3 working days in your ZFunds account.
Frequently Asked Questions.
1. What are Focused Funds?
Focused funds are the subcategory of equity funds. Focused funds cannot invest in more than 30 stocks. These funds are also known as Best Idea Funds as they chose to invest only in a limited number of companies.
2. How many stocks focused funds can have in their portfolio?
As per SEBI mandates, focused funds can only have a maximum of 30 stocks in their portfolio.
3. Which sector of companies is there in the portfolio of focused funds?
The fund manager of the focused funds has the freedom to invest in any sector in the market which helps the fund to give better exposure across the market and thereby offering diversification to investors.
4. In which market capitalization of companies can focused funds invest?
Focused funds can invest in any market capitalization of companies. They can invest their assets in large-cap, mid-cap, or small-cap stocks without any restrictions.
5. What are the risk and potential returns in focused funds?
Focused funds have a high return potential along with the high risk associated with them. These funds invest in fewer stocks which increases the return potential of the fund along with the risk of the fund.
6. What is the minimum amount of investment in focused funds?
The minimum amount of investment varies across schemes of different AMCs. The minimum amount of investment is not the same for all the AMCs.
7. How to invest in Focused Funds?
You can simply download and login to the ZFunds App to start investing in mutual funds for free.