What is focused equity fund?

Sanket joined a financial services company two years ago, after completing his MBA in Finance and he has been earning a steady income since then. During the pandemic and the resultant work from home, he managed to save some money and decided to begin his investing journey. As a full-time employee with no desire to track the market, Sanket knew that mutual funds were his best bet to participate in the country’s economic growth and beat inflation in a resilient manner. The question remained – which mutual fund scheme should he invest in? He was sure that most of his money should be allocated to equities as he was young, had a steady income, and a high risk appetite. He also wanted his portfolio optimised for high returns, and this meant investing a large portion in equities and allocating a smaller part to stable and debt schemes.

What is focused equity fund?

Sanket’s financial advisor had recently advised him to consider investing in a focused equity fund but he really did not know what is a focused equity fund. If like Sanket, even you are looking to understand what is a focused equity fund then read on.

Focused equity funds are open-ended equity schemes investing in a maximum of 20-30 stocks. So, instead of holding many stocks, these funds hold a small number of stocks that are generally focused on a specific theme, sector, strategy, industry, etc.

How does a focused equity fund work?

In addition to knowing what is equity fund it is equally important to understand how these funds work. Focused equity funds adopt an active management approach. This means that instead  of simply creating a portfolio that mimics a particular index, like in the passive management approach, fund managers of focused equity funds actively look for quality stocks and invest in them in order to generate alpha over the long-term. The stock selection can be done based on a sector, strategy, or market cap. Then there are also focused equity funds that might be thematic but are both sector and market capitalisation agnostic. The main aim of such focused equity funds is to invest as per the select themes across small, large, and mid-cap stocks and in multiple sectors and industries. To that extent, while such schemes are concentrated in terms of sticking to select schemes, they do offer a degree of diversification since they are market capitalisation and sector/industry agnostic.

Benefits of investing in focused equity funds

Focused equity funds are a unique offering that have some very specific benefits for investors. These include:

• Opportunities for alpha creation: Now, the main thing about focused equity funds is that they don’t overdiversify across multiple stocks and in fact, create concentrated portfolios. This can be both a good thing and a bad thing. When an investment portfolio is concentrated, it gives you an opportunity to holistically participate in a particular theme or sector and potentially generate significant returns over the long-term.
• Concentrated yet diversified exposure: Yes, focused equity funds create concentrated portfolios and buy only 25 to 30 stocks. However, these funds usually invest across market capitalisations, sectors, themes, and ideas. As a result, they can offer you the benefit of diversification.

Cons of investing in focused equity funds

While not necessarily a con, the fact that these funds can be high risk, can be a deterrent for many investors. Inevitably, a focused equity fund will carry a higher risk compared to equity funds that are well-diversified across several stocks.

Who should invest in focused equity funds

Now that you know what a focused equity fund is, it brings us to a very important question, i.e., who should invest in focused equity funds. There are two things that you must consider before investing in a focused equity fund. One, you should have the ability and willingness to absorb high levels of risk and price fluctuations, and two, you should have an investment time period of at least 5 to 7 years.

Focused equity funds can potentially offer a great opportunity to generate long-term portfolio growth. However, you must ensure that the investment adheres to your asset allocation strategy and fits well in your overall investment portfolio.

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