What is a Focused Equity Fund and Should you Invest in it?
A focused equity fund has a very limited portfolio because it invests in a small number of stocks. As per the SEBI (Securities & Exchange Board of India) guidelines, these funds can only invest in shares of 30 companies. Professional fund managers invest in select stocks to generate maximum returns.
This article explores all about focused equity funds – from its benefits to risks and things to consider before investing. Keep reading!
What is a Focused Equity Fund?
A focused equity fund is an equity mutual fund in which fund managers need to invest a minimum of 65% of total assets in equity and equity-related instruments. These schemes choose fewer sectors and thus showcase limited variation. They mostly include 20-30 entities or less which perform well in the market.
The objective of these mutual funds is to invest in top-performing stocks that can yield maximum returns for investors.
How Does a Focused Equity Fund Work?
Focused equity funds invest a minimum of 65% of their shares in equity or equity-related instruments; the rest is invested in other asset classes. These funds can invest across any segmentation of the market, i.e., they can invest as per capitalisation, sector, industry, etc. However, the maximum number of stocks they can invest in is limited to 30.
With a limited portfolio, focused funds aim to invest in high-performing assets. Hence, there’s a high potential to benefit from mid to long-term investments if the assets are allocated wisely.
Benefits of Investing in a Focused Equity Fund
Here are some of the advantages of investing in a focused equity fund:
1. Potential to Generate High Returns
A focused fund invests in a limited number of stocks. The fund manager researches and analyses the return potential of all the stocks available in the market and selects the top 30 as per his/her objectives. If the investments are made wisely, focused mutual funds can generate exceptionally high returns for the investors.
2. Helps in Portfolio Diversification
Focused funds can invest across market segments and capitalisations. They can invest in small, mid and large-cap companies. Fund managers can change the allocation as per market conditions. Additionally, 45% of the assets can be allocated in low-risk securities. Hence, fund managers get to have a very diversified portfolio with the flexibility of making modifications as per market scenario.
3. Handpicked Stocks by Fund Managers
As these funds can only invest in a maximum of 30 stocks, fund managers put a lot of effort in analysing and picking only the best in the market. Hence, you not only get to invest in a professionally-managed portfolio, but the portfolio will definitely have one of the best yielding stocks in the market.
List of 10 Best Focused Equity Funds
The following table lists the top 10 focused funds:
| Sl. No. | Name of the Fund | 3Y CAGR* |
| 1. | Quant Focused Fund | 23.54% |
| 2. | HDFC Focused 30 Fund | 20.58% |
| 3. | ICICI Prudential Focused Equity Fund | 22.96% |
| 4. | Union Focused Fund | 19.35% |
| 5. | Nippon India Focused Equity Fund | 21.29% |
| 6. | Franklin India Focused Equity Fund | 20.64% |
| 7. | IIFL Focused Equity Fund | 21.70% |
| 8. | IDBI Focused 30 Equity Fund | 16.30% |
| 9. | Mirae Asset Focused Fund | 18.82% |
| 10. | SBI Focused Equity Fund | 17.21% |
* Returns data valid as of November 10, 2022.
Tax on Focused Equity Funds
The taxation of a focused fund is the same as that of other equity-oriented mutual fund schemes. Go through the tax implications below:
- When Long-term Capital Gains (LTCG) exceed Rs.1,00,000 in a given year, the rate of tax is 10%. In this case, the minimum holding period of the fund units is 1 year.
- In case fund units are sold before 1 year, investors need to pay a 15% Short-term Capital Gains (STCG) tax.
Things to Consider Before Investing in a Focused Equity Fund
Here are few factors you might consider checking before you start investing in a focused fund:
1. Risk
The risk this fund carries is higher than any other type of hybrid mutual fund as it invests in a minority of stocks. Investing in only select stocks might make your investment riskier and not exactly diversified in a wider concept.
2. Return
The handpicked funds of a focused fund make all the difference in your returns. Fund managers can select stocks that they believe will drive the return potential of the fund. However, if the strategy doesn’t work and the 30 selected stocks underperform in the long term, the returns on your investments might get reduced exponentially.
3. Investment Horizon
As focused funds invest in a limited number of shares, it might experience market volatility in the short run. Hence, if you are looking for a short-term investment option, this might not be the ideal option for you.
4. Exit Load
Some AMCs might charge a fee for early or premature exit from the fund. This can affect your return. Hence, checking whether or not your chosen fund has an exit load is always a wise idea.
5. Expense Ratio
All mutual funds charge a fee to cover their managerial and operational costs. This is called the expense ratio. This is how much you invest towards the handling of your invested corpus. It is wise to invest in funds with a low expense ratio which means that the return value will be higher.
Who Should Invest in a Focused Equity Fund?
Focused equity funds are ideal for investors with a high-risk appetite. Despite the risks involved, these funds have the potential to fetch favourable returns in the future. Individuals who want to invest in equity with the objective of long-term wealth creation can consider allocating their funds to focused equity schemes. In addition, investors looking for a concentrated yet diversified equity portfolio can select these funds.
Also Read
Final Word
A focused equity fund holds a comparatively small number of stocks, concentrated within a few sectors. These funds facilitate a precise exposure to the equity market and follow the “look for quality” concept. An individual who is confident about the performance of certain sectors can choose to invest in these funds for maximising portfolio returns in the long run.
However, if you are just starting your investment journey, check out a host of funds on Navi Mutual Fund or download the Navi App to invest now!
Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
FAQs
Ans: A first-time investor can consider a focused equity fund if he/she wants equity exposure. Note that investors do not need to take the buy-and-sell decisions. Moreover, they do not have to track the market. Fund managers of the schemes take all the investment decisions, keeping in mind the fund’s objective and SEBI’s regulations.
Ans: No, an individual is not eligible for tax benefits with regard to his/her investment in a focused fund. In case investors are looking to save taxes by investing in mutual funds, they can consider investing in the Equity Linked Savings Scheme (ELSS). As per section 80C of the Income Tax Act, 1961 one will be eligible for a tax deduction of Rs. 1.5 lakh (maximum).
Ans: A focused equity scheme can invest in only 30 stocks (maximum), while Flexi cap equity funds have no restrictions on the number of stocks in the portfolio. A fund manager of a focused fund handpicks stocks with the best return potential. That said, a Flexi cap fund distributes its portfolio weightage across companies of different sectors, irrespective of the market capitalisation.
Ans: The expense ratio refers to the annual maintenance fee that a fund house levies on investors. The main purpose of charging the expense ratio is to cover the cost of operations. The expenses incurred for running the operations of the fund include advisor and auditor fees, advertising costs, administrative costs, and more.
Ans: Net Asset Value (NAV) denotes the performance of a mutual fund scheme. You can calculate NAV by dividing the mutual fund scheme’s market value (inclusive of all securities) by the scheme’s total number of units on a particular day.
You can calculate it by using this formula:
Net Asset Value = (Overall Assets – Overall Expenses – Overall Liabilities)/Total number of Units
Want to put your savings into action and kick-start your investment journey 💸 But don’t have time to do research? Invest now with Navi Nifty 50 Index Fund, sit back, and earn from the top 50 companies.
Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
