Focused funds are topping performance chart. Is it time to invest?
Three schemes from the category that is mandated to invest in a concentrated portfolio of 30 stocks have found place among the top five performers in the multi cap category in the last one year.
IIFL Focused Equity Fund has occupied the first place in the last one year, followed by SBI Focused Equity Fund and DSP Equity Fund in the second and third places. The topper in the three-year time-frame is also a focused fund: Axis Focused 25 Fund.
Backed by the impressive performance, the assets (AUM) managed by the focused equity mutual fund category has risen to Rs 44,681.52 crore in October, from Rs 37,392.52 crore in April. A gain of Rs 7,289 crore in the current financial year.
What does this mean? Have investors started betting on focused equity schemes for higher returns? Should others also follow suit?
“Investors tend to look at the returns while choosing a scheme to invest. This is why some focused funds have gained huge AUMs in this year. A focused strategy is a way of betting more on stocks that could so well. Concentration to stocks can lead to massive gains, but also massive falls,” says Puneet Oberoi, Founder, Excellent Investment Advisorz, a Delhi-based wealth management firm.
As said earlier, focused mutual fund schemes have a mandate from Sebi to invest in a maximum of 30 stocks. Further, the focused strategy funds can focus on any segment in the market: large cap, mid cap, small cap, multi cap, and so on. As per Sebi norms, the scheme should mention where it intends to focus for investments. There are 23 focused funds in the mutual fund industry at this point.
A fund manager in a focused scheme picks up a few stocks and build a concentrated portfolio to make extra returns. The plus side of the strategy is: if the high-conviction bets are proven right, the scheme would make a lot of money. But if the bests go wrong, it will also lose heavily. That is why focused schemes are considered highly risky. They can also have higher volatility. Therefore, these schemes are recommended only to investors with a higher risk appetite.
“I would ask investors to not get lured by their great returns because if the call goes wrong, they can also lose heavily. This strategy is for aggressive investors. Retail investors should try and stay away from these schemes,” says Neeraj Chauhan, CEO, The Financial Mall, a Delhi-based wealth management firm.
Mutual fund advisors believe that retail investors, especially those with a modest corpus, should stick to equity mutual funds with a diversified portfolio. Compared to focused schemes, diversified schemes would have many stocks, say, 50 or 60, in their portfolio. This would mitigate the impact of a stock call going wrong, as it would be a small faction of the total portfolio.
“If you have a small corpus to invest, you should not foray into the concentrated funds because the risk involved is too much. Downside protection is the main aim for small corpuses,” says Puneet Oberoi.
Investors with a larger corpus and a well-diversified portfolio can take a small exposure to focused schemes to pocket some extra returns, says Neeraj Chauhan. However, investors should be aware of the risks involved in these schemes before betting on them, he adds.
“You should be okay with the idea of your scheme falling more than the other schemes if a call goes wrong. No fund manager can take all right calls. If you are okay with such falls, you can invest in focused schemes,” says Neeraj Chauhan.