From Nippon India to Mirae Asset, focus funds shine in market rebound

Most focused funds have exposure of around 50-60% in large-cap stocks, with the remaining between mid- and small-cap stocks

The sharp surge in the equity markets in the past year has propelled returns for most equity funds, barring large-cap schemes. Within equity schemes, focused funds have given even better returns.

Several focused equity funds — that invest in a smaller basket of stocks —have given one-year returns in the range of 75-100 per cent. In comparison, the Sensex is up 63 per cent.

The data from Value Research shows that Nippon India Focused Equity Fund and Mirae Asset Focused Fund have given returns of 101.60 per cent and 88 per cent, respectively, in the past year.

According to Securities and Exchange Board of India (Sebi) guidelines, focused funds should not have more than 30 stocks in their portfolio. These 30 stocks can be from the large-, mid- or small-cap universe.

Most funds in this category take concentrated bets on stocks or sectors. The strategy seems to have paid off amid a strong rebound in the market from Covid-19 lows.

IIFL Focused Equity Fund over the past year has given returns of 77 per cent; even in a five-year period it has managed to give compound annual returns of 18 per cent. The fund follows the SCDV (secular, cyclical, defensives, value trap) framework wherein it invests a large proportion of the portfolio (40-60 per cent) in high-quality secular growth companies. The rest of the portfolio is invested across quality cyclicals and defensives, while having limited exposure to value stocks.

Mayur Patel, fund manager of IIFL Focused Equity Fund, says: “Pure bottom-up strategy across these quadrants is deployed with an aim to generate long-term compounding while encashing some quality alpha ideas in the cyclical and defensive segments. Having optimum weight behind high conviction ideas under this framework has helped us over the last few years.”

Most focused funds have exposure of around 50-60 per cent in large-cap stocks, with the remaining between mid- and small-cap stocks. While large-cap stocks protect the downside during volatile times, mid-caps and small-caps can help funds generate higher alpha.

While focused funds have given strong returns in one year, their long-term returns may fall in line with other diversified equity funds, say some experts.

Gaurav Rastogi, CEO at Kuvera, says: “Focused strategy doesn’t work in every market condition and it becomes difficult for investors to choose which fund will deliver better returns in the years to come. I suggest investors to look at other pure diversified equity funds which have given index beating returns across market cycles.”