Equity Mutual funds can invest across multiple sectors and in a broad range of companies, however the returns from such funds may also get restricted because not all companies that are listed on a stock market like the Bombay Stock Exchange, can perform equally well at the same time during a bull market cycle. One of the main purposes of investing in ordinary mutual funds is to promote diversity in equity investments. Almost all mutual funds invest in a large number of Indian companies in predefined percentages to save investors from the trouble of selecting each security independently. This diversification approach adopted by mutual funds allows an investor to gain access to the equity risk premium while minimizing risk and volatility. Now, while this diversification helps mutual fund investors maximise their returns while minimising risks and volatility, on the flip side, these mutual funds may also present certain disadvantages.
If a fund investor believes that a certain sector or industry will outperform soon, they can increase returns by concentrating or focusing fund investments in that sector or area of the market. Focused funds are a type of mutual fund that invests in a smaller number of stocks on a stock exchange like the national stock exchange in Mumbai, BKC. These focused funds are very concentrated on a narrow selection from only a few sectors, instead of a varied and broad equity exposure. Focused funds hold positions in around 20 – 30 companies or less as per the guidelines of Securities and Exchange Board of India (SEBI), while other mutual funds have positions in over 100 companies listed on the stock exchange in Mumbai, Bandra. The goal of these focused mutual funds are to deliver optimal returns by investing in only the best performing assets on the stock market in India.
Focused mutual funds are very much like Multicap mutual funds that can also invest in any segment of the Market: Large cap, Midcap, Small cap and so on, with a lesser number of shares. Focused Fund managers have more liberty to decide how money gets allocated between large, small and medium cap companies listed on the stock market. This may help a focused fund investor not only get a mutual fund portfolio that is diversified across market caps but also one which is flexible enough to adapt quickly as per the changes in the stock market in Mumbai. Although focused mutual funds do not experience the benefits of diversification because of a search for quality strategy, focused funds rely more on research expertise for above average stock picking of shares listed on the share market in Mumbai.
Investors should always remember that focused mutual funds come with a much greater risk on account of having a lesser number of stocks in their fund portfolio. To build a mutual fund portfolio a fund manager selects stocks that he or she believes may provide high returns to the investor over a predefined investment horizon. However, this concentration means that even if a few choices become incorrect it can lead to considerable losses and underperformance till the focused fund portfolio is rebalanced again by the fund manager. Hence these focused funds are recommended by some investment advisors or mutual distributors only to investors who are willing to take a higher level of risk than diversified mutual funds. The risk of these funds is even greater than mutual funds like multi cap mutual funds which are diversified. Focused funds sometimes are recommended for veteran investors and individuals with a high risk appetite who are seeking exposure to selective companies, thus negating the limitation of other mutual funds.
We conclude by reiterating that mutual funds do not separate companies and sectors while investing in the stock markets in Mumbai, which in turn may limit the returns by investing in stocks that do not perform well. However, in these focused funds, the investment is limited to stocks of only selective well performing companies, thus negating the limitations of other non focused mutual funds. Additionally, since these focused mutual funds may only invest in a few carefully chosen stocks, they may be much more effective in obtaining greater returns for focused fund investors.
The information, analysis and opinions expressed herein are for educational purposes only and are not intended to provide specific advice or recommendations for types of mutual fund schemes. This material is not an offer, solicitation or recommendation to purchase any financial products or services or focused mutual funds. Always remember that all investments, including focused mutual fund investments carry some level of risk, including the potential loss of principal invested.