One specific type of equity mutual fund is a focused fund. Over the last few years, the popularity of focused equity mutual funds has increased because they allow limited stock investments and potentially offer high returns through pocket-friendly investment mediums like SIP (Systematic Investment Plan). But it is essential to understand these funds and how they function before you take the plunge.
Here is everything you should know about focused equity mutual funds:
What are focused equity mutual funds?
Focused mutual funds are a type of equity fund that invests only in a limited number of stocks. As per the Securities and Exchange Board of India (SEBI), these mutual funds cannot invest in more than 30 stocks, unlike general equity mutual funds that can hold anywhere between 50 and 100 stock positions. Focused equity mutual funds can invest across any market segment: large-cap, mid-cap, small-cap, etc. However, in reality, these funds concentrate on a limited variation across a few sectors instead of relying on diverse equity positions.
How do focused equity mutual funds work?
As specified, focused equity mutual funds create a concentrated portfolio by investing in a few selective, high-performing stocks. These funds have no investment restriction in terms of sectors. Focused equity mutual funds can invest in securities of different sectors with different market capitalization. Fund managers can decide how and where to allocate the corpus: large-, medium- and small-cap companies.
What are the benefits of focused equity mutual funds?
- Potentially high returns: Generally, an equity mutual fund holds positions in many companies to reduce risk. This also reduces the earning potential of the portfolio, especially in a polarized market where only selective stocks perform well. In focused equity mutual funds, your corpus is invested in high-performing stocks, which increases your chances of generating potentially high returns.
- Optimum diversification: Focused equity mutual funds have complete freedom to invest across sectors in companies with different market capitalization. Further, these funds can also change their asset allocation between company sizes as per the market performance. Hence, the focused equity mutual fund portfolio is optimally diversified and offers flexibility to change as per market conditions.
- Carefully picked stocks: Focused equity mutual funds can only invest in 30 companies. Hence, the fund managers spend a lot of time and effort to find the top-performing stocks in different market spheres and make investments in the chosen ones. This improves your chances of maximizing returns as compared to investing in a broader stock market.
Should you invest in focused equity mutual funds?
If you are an investor with a moderate or low-risk appetite but desire high returns, investing in focused equity mutual funds through the SIP mode can be wise. These funds come at low risk because of their limited exposure to equity investments but offer significantly high returns because they are carefully picked across sectors and capitalizations. However, if you are a new investor, it is not advisable to invest in these mutual funds as they are more volatile than multi-cap mutual funds, especially in the short and medium-term. Further, opt for focused equity mutual funds only if you want to remain invested for at least five years. These mutual funds require at least five years to show true potential.
Meanwhile, you can stay updated about your investments through the Tata Capital Moneyfy app. Use the Tata Capital Moneyfy app to research, invest, monitor, and rebalance your mutual fund investments.