Focused Funds: A Methodical Approach To Stock Selection

The Indian equity markets have been trading on shaky ground since the start of 2022. With global markets also feeling the heat of rising inflation, mutual funds have become an apt investment avenue in the medium to long term. The article takes a look at what focused funds have to offer

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The basic idea of investing is to diversify your portfolio rather than putting all your eggs in one basket. While it is critical to distribute investment over a variety of stocks and sectors to minimise the overall portfolio risk, simply increasing the number of stocks in an equity portfolio reduces the performance beyond a certain point. In fact, a portfolio with far too many stocks and lesser proportion may dilute the benefits of performing stocks.

Composition of Focused Funds

Focused funds, as the name implies, invest solely in high-quality stocks with the potential to generate wealth in the long term. The goal of this fund and fund manager is to build a successful portfolio by limiting investments to high conviction stocks with optimal risk-to-reward ratios. A focused fund can invest in a maximum of 30 stocks with a minimum of 65 per cent of the portfolio in equity and equity-related securities, according to the mandate issued by the Securities and Exchange Board of India (SEBI). Focused funds can invest in a wide range of market capitalizations, including large, mid-cap and small-cap companies.

While conventional equity funds do not have a limit on the maximum number of stocks they may invest in, focused funds concentrate and keep their basket to 30 stocks. According to studies, once a portfolio is diversified over 20-25 stocks, unsystematic risk as measured by standard deviation reaches ideal levels. A focused fund is the only mutual fund with such restrictions, while other mutual funds are allowed to invest in up to 100 stocks.

Deep Dive into Focused Funds