All you need to know about Focused Equity Funds

Published On: 23-Jul-2021

Often ‘the more the merrier’, but sometimes ‘the lesser the better’. This holds true while investing in Mutual Funds too. Although Mutual Funds are popular for offering diversification, there is a type of scheme that adopts a focused and concentrated approach too.

What are Focused Funds?

Focused Funds are Equity Mutual Funds that invest at least 65% of their total assets in Equities and Equity-related instruments and can have a maximum of 30 stocks in their portfolio. They can invest across market capitalisations, sectors, and industries. The portfolio comprises high conviction stocks with higher weights. Thus, the return potential of such funds is likely to be very high over the medium to long term.

What are the advantages of Focused Funds?

While Diversified Equity Funds do not have any restrictions on the number of stocks in the portfolio, Focused Funds are allowed to invest in a maximum of 30 stocks. This concentrated and focused investment approach brings several benefits. These include:

  • A portfolio of a maximum of 30 stocks gives an investor exposure to hand-picked ideas.
  • The portfolio comprises high conviction stocks with higher weights which may lead to positive alpha generation.
  • Funds have the flexibility to invest across the market capitalisation spectrum i.e., Large-Caps, Mid-Caps and Small-Caps. and would have the potential to enhance its overall portfolio outcome.
  • They also have the flexibility to invest across sectors or industries. Such flexibility increases the potential of Focused Funds to enhance their overall portfolio outcome.
  • Fund Managers carefully study the companies and use their experience and expertise to pick the best stock ideas that have the potential to deliver superior performance over time. In the long-run and also take larger weights in selected stocks which may lead to positive alpha generation.

How are Focused Funds taxed?

Since Focused Funds invest at least 65% of their net assets in Equities and Equity-related instruments, the tax rules applicable to Equity Funds are applicable to them. For instance, if you redeem your investment in 12 months or less, your gains on redemption will attract a short-term capital gains tax of 15%. On the other hand, if the investments are held for more than 12 months, capital gains arising out of your investments will attract a long-term capital gains tax of 10% plus applicable surcharge, if any. Furthermore, long-term capital gains up to Rs. 1 lakh in a financial year are exempt from tax.

Whom are Focused Funds suitable for?

These funds come with relatively higher risks on account of the limited number of stocks in the portfolio. Thus, existing investors who are willing to assume risks for generating higher returns can consider investing in Focused Funds. Such funds are also suitable for investors with a medium to long-term investment horizon. Additionally, investors who are looking for a concentrated portfolio to complement their core Equity portfolio holdings may also invest in Focused Funds.

What are the things to check before investing in Focused Funds?         

Here are certain pointers that one should refer to before investing in Focused Funds:

1. Risk appetite:

Such funds are suitable for investors with a relatively higher risk appetite as the portfolios are concentrated and may carry relatively higher volatility.

2. Investment tenure:

As the funds consist of select stock ideas, they may need the time to perform. Thus, they are preferable for investors with a medium to long-term investment horizon.

3. Tax implications:

The gains on redemption will be subject to the tax treatment of Equity Funds.

4. Fund Manager’s expertise:

You must check the experience and track record of the Fund Manager for managing a focused strategy with an optimal portfolio outcome.

To sum it up

Focused Funds are a type of Equity Funds that invest in a limited number of stocks. They, thus, provide you with an opportunity to create wealth from their focused and concentrated approach. Such funds may be ideal for you if you are a high risk-taking investor with a medium to long-term investment horizon.