Focused funds can work in a rising market

Investors who can stomach higher risk can invest up to 25% in these funds

There will be more choice for investors who prefer to have a small portfolio but are not brave enough to invest in individual stocks to build it. Three fund houses — Pramerica Mutual Fund, Union KBC MF and IDBI MF — have recently filed offer documents the Securities and Exchange Board of India (Sebi) to launch ‘focused funds’.

Focused funds invest in a portfolio of up to 25-30 stocks across market capitalisation and sectors. In other words, the portfolio is much more concentrated than the usual diversified equity funds, which typically invest in 50-60 stocks. “The basic objective of these funds is to have a high-conviction, concentrated portfolio, which can achieve superior returns over diversified funds,” said Pankaj Murarka, head – equity, Axis MF.

According to G Pradeepkumar, chief executive officer, Union KBC MF: “Focused funds can outperform their diversified peers and benchmarks in a rising market. In the past  year, equity diversified funds have given average category returns of 21.6 per cent. Seven of the 10 focused funds have beaten these returns, data collated from Value Research shows.

Motilal Oswal Most Focused Midcap 30 and Motilal Oswal Most Focused Multicap 35 have given one-year returns of 50.9 per cent and 53.2 per cent, respectively. DSP BlackRock Focus 25 and Kotak Select Focus Fund have given returns of 28.5 per cent and 26.6 per cent, respectively, in the same period.

Murarka believes 25-30 stocks is a good number, as it ensures adequate diversification and yet enables the fund manager to give higher weightage to the selected stocks.

The flip side is that the higher concentration makes these funds a bit riskier. Compared to your usual diversified equity funds, they are likely to be more volatile and fall more in a falling market. “These funds can create higher volatility, especially in the short term, and can deviate significantly from the benchmark,” said Murarka.



Some experts believe the risk element is not too high, as the funds are well-diversified across sectors and the stocks picks are essentially similar to that of other diversified equity funds. “It's not that focused funds invest in contra picks or undiscovered or small stocks,” said Vidya Bala, head – MF research, Fundsindia.com. For instance, Union KBC's yet-to-be-launched 30-stock fund will use a bottom-up strategy, focussing on companies that are expected to post faster growth but available at reasonable valuations.

These funds are suitable for investors who can absorb a slightly higher level of risk. According to Hemant Rustagi, CEO, WiseInvest Advisors, one way to reduce risk in these funds is to invest through systematic investment plans  rather than a lump sum. He believes focused funds could be considered as an addition to one's core portfolio. For example, if you already have a large-cap exposure of, say, 30 or 40 per cent, and want to increase it to 50 per cent, one can look at focused funds with a large cap bias for the purpose, says Rustagi. Pradeepkumar, for his part, says that experienced investors can put 25-30 per cent of equity corpus in these funds.

Due to the short-term volatility, investors should stay invested for at least two-three years, said experts. Ensure the fund sticks to its mandate and the number of stocks in the portfolio is confined to the said number.