Focused funds are equity mutual funds that invest in a concentrated portfolio of stocks. Unlike other diversified mutual funds, a focused scheme can invest in a maximum of 30 stocks.

Instead of spreading the investments across many companies, the fund manager puts money into a smaller number of stocks with high conviction. Unlike large-cap funds or mid-cap funds, focused mutual funds can invest across companies of all market caps.

The investment strategy of this mutual fund scheme works well when the select companies perform strongly. But it also increases the risk of bad investment decisions. If one of the fund’s major holdings falls sharply, it can have a bigger effect on the fund’s NAV.

Focused funds may suit you if:

• You want a high-conviction strategy: The fund managers of focused funds have fewer stocks to choose from, and therefore, can put more money into their strongest ideas.
• You can stay invested for 5+ years: A concentrated portfolio may go through periods of high volatility and underperformance. They can be a good fit if you have a long-term investment horizon of at least 5 years.
• You are comfortable with higher risk: Fewer stocks mean that individual companies have a bigger impact on the fund’s performance. You should be comfortable seeing your investment value fall without the urge to panic-sell and exit.
• You already have a diversified portfolio: This scheme can be a good additional strategy for your portfolio, rather than being the only equity fund you own.

When you invest in a focused fund, your money is pooled with that of other investors. The fund manager then selects up to 30 stocks based on the scheme’s investment strategy. Since the portfolio is concentrated, each stock can have a meaningful weight in the fund.

Suppose you invest ₹10,000 in the focused scheme when its NAV is ₹50. You receive 200 units (₹10,000 / ₹50).

Now, let’s say the scheme has invested in 25 stocks and one of its major holdings has an 8% weight. That means around ₹800 of your ₹10,000 investment is indirectly invested in that company.

If that stock rallies, it can give your overall investment in the fund a noticeable boost. But if the same stock falls sharply, the fund can also feel the impact.

Here’s a simple scenario:

This is only an example. A focused fund can also deliver a negative return, especially over the short term.

Focused schemes offer you several advantages, such as:

• High-conviction investing: The fund manager has fewer stocks to choose from. This allows them to put more of the portfolio into companies they strongly believe in.
• Greater impact from well-performing stocks: If a major holding performs well, its larger portfolio weight can have a noticeable effect on the fund’s returns. This is one of the main reasons many consider focused investing.
• Exposure across sectors: Unlike sectoral funds, a focused fund is not restricted to one industry. Depending on its strategy, it can hold companies from banking, IT, healthcare, auto, infra, consumer goods and other sectors.
• Easy to focus on main holdings: With a limited number of stocks in the portfolio, it can be easier to track which companies have the biggest impact on the fund.

However, you must note that none of these advantages guarantees returns. There are some risks associated with these schemes too.

• Concentrated risk: This is the biggest risk. When a fund owns only a limited number of stocks, a major fall in one or two holdings can affect the overall portfolio. The impact is higher than what it would be in a broadly diversified fund.
• High volatility: Focused funds can experience sharper ups and downs than funds with more diversified portfolios. You should be prepared for this before investing.
• Fund manager risk: The fund manager’s correct stock selection becomes very important. If several major investment decisions go wrong, the fund can underperform for an extended period.
• No guarantee of big wins: Having fewer funds doesn’t automatically make it a better scheme. A diversified fund with 50 or 60 stocks can still outperform a focused fund if its stock selection is superior.

While focused funds limit the number of companies they invest in, diversified funds like flexi-cap funds or multi-cap funds generally hold a broad range of stocks. Let’s compare the two across different parameters:

While there are differences in their portfolio spread, both the schemes invest in equity. If you prefer a scheme with a mix of equity and debt, you can also explore hybrid funds.

Here are some important factors to look at while choosing the right focused funds to invest in:

• Study the portfolio: Go through the fund’s top holdings and sector allocation. A focused scheme can hold a maximum of 30 stocks, so its largest holdings matter a lot. Make sure you’re comfortable with the companies and sectors that make up a large part of the portfolio.
• Look at the long-term performance: Compare long-term performance, say the past 5 years and see how its returns compare with its benchmark and other schemes in the same category. A single good year doesn’t tell you much.
• Check fund behaviour during market falls: Don’t look only at the returns during bull markets. See how the scheme behaved during periods when the broader market declined. This can give you a better idea of the level of volatility you may have to handle.
• Check the fund manager’s track record: Look at the fund manager’s experience and how long they have managed the scheme. You should also understand whether the manager follows a consistent investment approach.
• Consider a direct-growth plan over a regular plan: Direct plans have lower expense ratios as there is no distributor commission involved. Also, the growth option keeps the gains in the fund instead of paying them out. This helps in long-term compounding of your investment.

Remember, the best focused mutual funds for you aren’t necessarily the ones with the highest returns. They’re the ones that fit your financial goals and risk tolerance level.

Once you’ve picked the focused fund to invest in, starting a SIP on Millions is super easy:

• Download the Millions app on your smartphone from the Google Play Store or iOS App Store.
• Enter your mobile number, provide your basic details, and complete your paperless digital KYC verification in minutes.
• Head to the mutual funds section, filter by ‘Focused Funds’, and compare top-rated funds by portfolio concentration and performance.
• Tap on ‘SIP’ and pick your investment frequency (monthly, weekly, or daily).
• Enter your monthly investment amount, choose your monthly debit date, and complete your first payment.

Your SIP is live! To benefit from focused funds, it’s important to stay invested for the long term, even when the market is volatile in the shorter term. SIP helps you invest regularly without worrying about the right time to invest.

Since focused schemes can be risky, you can balance your portfolio by also investing in safer options like corporate bond funds, 10-year gilt funds, or money market funds. This can give you debt exposure and balance the risk.