Focused Fund: A Selective Approach to Generating Exceptional Returns

A focused fund is a type of investment fund that concentrates its assets in a relatively small number of positions, as opposed to a diversified fund which spreads its assets across a larger number of investments.

What are Focused Funds?

As per SEBI mandate, Focused Fund can invest in max. 30 stocks with a minimum exposure of 65% of the portfolio in equity & equity related instruments. Focused Fund can invest across market capitalization – i.e., Large Cap, Mid Cap & Small Cap.

Other equity funds do not have a limit on the investment to maximum number of stocks, focused fund restricted investment to 30 stocks.

Why Focused Fund?

A selective approach to investing can lead to exceptional returns. By focusing investments in a small number of high-conviction ideas, a focused fund has the potential to generate higher returns than a diversified fund.

However, it is important to note that this approach also comes with higher risk and requires thorough research, due diligence, and active management to be successful.

Advantages of a Focused Fund

Increased potential for high returns: A focused fund's concentration in a small number of positions allows it to potentially higher returns than a diversified fund. Because the fund is only invested in a select few positions, the performance of these positions has a larger impact on the overall performance of the fund.

Greater control over portfolio diversification: With a focused fund, the Fund Manager has more control over the diversification of the portfolio.

This allows them to make concentrated bets on high-conviction ideas that they believe have the greatest potential for returns.

Ability to make concentrated bets on high-conviction ideas: A focused fund allows the portfolio manager to make concentrated bets on their best ideas.

This allows the manager to put more capital behind their highest-conviction investments, which can potentially lead to higher returns

Disadvantage of Focused Fund

• Higher risk due to concentrated portfolio
• Lack of diversification can lead to greater volatility
• Dependence on a small number of companies for returns
• Limited liquidity and potential lack of marketability in comparison to diversified funds
• Dependence on the success of a few companies or sectors.
• Limited ability to weather market downturns or economic recessions.
• Higher management fees as compared to diversified funds.
• Higher chance of underperformance if the selected companies or sectors do not perform well.

Who should consider investing in a focused fund

1. Investors with a high-risk tolerance and a long-term investment horizon
2. Investors who have a good understanding of the market trends and sectors in which the fund is invested
3. Investors who have done thorough research and have a strong conviction in the potential of the companies or sectors in which the fund is invested
4. Investors who are looking for higher returns but are willing to accept the higher risk associated with a focused fund
5. Investors who are looking for a way to gain exposure to specific market trends or sectors that they believe will perform well
6. Investors who are looking to complement a diversified portfolio with a focused fund to increase returns.
7. Investors who are not worried about market downturns and recessions

Conclusion

Investors who are considering investing in a focused fund should have a high-risk tolerance, a long-term investment horizon, and a strong understanding of the market. They should also be comfortable with the potential risks.

Focused funds are not suitable for all investors, and diversification is always a good idea as it can reduce the risk and also help investors to achieve their financial goals.

It is important for investors to conduct thorough research and consult with a financial advisor before investing in a focused fund.