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