Should Investors Opt for ‘Focused’ Mutual Funds?

1. High Potential Returns: Generally, a diversified equity mutual fund has positions in many companies to minimize risk exposure. But as a result, the returns can be low especially in a polarized market where only few stocks outperform. In focused funds, the capital is deployed only in limited stocks and these are typically high conviction bets that a fund manager believes will do well.
2. Well-Researched Stock Selection: The fund managers carefully research and analyse the various aspects of a company before investing in them. Since they only invest in a handful of stocks, one wrong selection could have a serious impact on the returns. So a huge amount of effort goes in the selection process. It means there is less room for trial and error, and they will pick up the stocks only after in-depth assessment. The process works in favour of investors as they get exposure to ‘best of the breed’ stocks.
3. Diversification across Size & Sector: Focused Funds have the freedom to invest in any market capitalization and sectors. This no restriction means they can invest in small cap, mid cap and large cap companies. Plus they can change this split between company sizes across various sectors according to the market unlike multi-cap funds where 25% allocation is mandatory in all type of market caps. So not only you get a portfolio that is diversified across market caps & sector but also one which is flexible enough to change as per market conditions.

Thus, the primary purpose of a focused equity fund is to be able to hit the bull’s eye through the choice of the right stocks with the possibility of high returns.