Focused Equity Funds – Meaning, Types, Benefits, Investment Strategy and Risks

A focused equity fund provides high returns over the medium to long term by investing in high-conviction stocks of stronger value. A high-conviction stock relates to a small number of stocks picked by experts based on their best predicted high-performance analysis for the future. These stocks are high-quality blue chip companies with high market share and strong competition.

As per Securities and Exchange Board of India (SEBI) guidelines, a focused equity fund is an equity mutual fund scheme that invests at least 65% of its total assets in equities and equity-oriented instruments, subject to a maximum of 30 stocks in its portfolio.

Are you interested in learning more about focused equity funds, their meaning, types, and benefits? Continue reading to learn more.

Best Focused Equity Funds in India

Based on three-year return research by ET Money, the top focused equity funds for 2023 for lump-sum investment are:

Based on three-year return research by ET Money, the top focused equity funds for 2023 for monthly SIP investment are:

Source: ET Money - Focussed Equity Mutual Funds

Types of Focused Equity Funds

A focused equity fund invests across diversified streams, including market capitalisations, industries, and sectors subject to a maximum of 30 stocks. As such, it can invest across large, mid, or small caps based on market capitalisation.

Likewise, to explore different sectors, managers of focused funds can consider investing in chemicals, information technology, finance, pharma, healthcare, etc. Some focused equity funds are small-cap funds, sectoral funds, large-cap funds, value funds, and the like.

How Does a Focused Equity Fund Work?

To understand how a focused equity fund works, you should first understand the purpose of such funds. Focused funds can invest in a limited number of stocks with a maximum cap of 30 stocks.

So, they have a concentrated portfolio for selecting stocks within the limit of 30 stocks. However, focused funds do not restrict where to invest, implying they can invest in any company, sector, industry, or market capitalisation.

For instance, fund managers have the freedom to assess how investor money gets allocated between large caps, mid-caps, and small caps companies for maximising gains from investment.

Who Should Invest in a Focused Equity Fund?

Focused funds offer great returns over the medium to long term. However, they entail a higher risk owing to a concentrated portfolio. So, even one wrong bet on a stock could lead to huge losses for the focused equity fund scheme or vice versa.

Investors must carefully evaluate their investment priorities based on the factors below before investing in a focused equity fund:

Risk appetite

A focused fund is more suitable for investors with a high-risk appetite as they are more volatile than diversified mutual funds over the short to medium term. If you are willing to take high risks to generate higher returns, then you should invest in them.

Investing experience

A focused fund has a higher risk element as it is equity-based. So, a focused equity fund may not be the right investment vehicle to start with if you are a new investor. They are more suitable for seasoned investors who understand the risks associated with focused funds and invest accordingly.

Investment horizon

As focused funds are equity funds, they need a longer period of growth traction. Also, these funds invest in select stocks, which may take time to show their true potential. So, it is more suitable for investors with a long-term investment horizon of five years and beyond.

Taxability of Focused Equity Fund

The taxability of focused equity funds is similar to other equity mutual funds. According to the Income Tax Act of 1961, short-term capital gains tax is applicable for your investment held less than one year at the rate of 15%. Investments held for more than a year attract long-term capital gains tax at 10%, provided your total gains exceed Rs.1 lakh in a fiscal year.

Benefits of Focused Equity Funds

Focused equity funds come with several benefits to investors. The following are some of them:

Expected higher returns

Focused funds invest in select high-conviction equity stocks within the permissible limit. As such, they have more scope for generating high potential returns over the medium to long term.

Freedom to invest across diversified streams

Focused funds have limits only on the number of stocks to be invested. There is no limit on where the funds can invest. As such, they have complete freedom to invest across any company irrespective of market capitalisation, industry, and sector.

For instance, they can split their investment based on company size giving the fund a flexible investment option. So, fund managers can easily switch between stocks based on market conditions to maximise investor returns.

Likewise, they can easily select stocks from any sector of their choice, ensuring the portfolio is not restricted to any one sector. It increases the chance of gaining higher returns over time.

A concentrated investment in good stocks

As a focused equity fund has a limit of 30 stock investments, fund managers do considerable market research to select the best stocks, which are mainly high-conviction and quality stocks. It thus ensures that the best stocks are in the investor portfolio, increasing the chances of earning higher returns than the larger stock market.

Things to evaluate before investing in a Focused Equity Fund

Following is a list of things that investors must evaluate before investing in equity funds:

Returns

In a polarised market, a focused equity fund can give better returns than diversified funds and stock markets. A polarised market is concentrated around certain stocks that drive the market while other stocks show lacklustre growth.

So, if a focused fund has stocks that drive the market, you can expect exceptional returns from the scheme. In a broad-based stock market scenario, you may not earn good returns via a Focused Fund as few stocks may not drive the market.

Risk

Focused funds are more concentrated in a few stocks, with a maximum of 30 stocks in a portfolio. They take big positions in select stocks. As such, these funds are not diversified, increasing the risk in focused funds.

Investment term

Focused funds invest in select stocks. They need time to grow and could be more volatile in the short term. They are suited for investors who have a medium or long-term investment goal.

Taxability

Capital gains on redemption of a focused equity fund get the same tax treatment as that of an equity fund. So, make redemptions accordingly by considering the tax factor.

Fund cost

While investing in a focused equity fund, evaluate its expense ratio before investing. The expense ratio indicates the cost of managing your fund by the fund house. Consider focused funds with low expense ratios, as it will increase your net returns.

Fund manager expertise

Evaluate the fund manager's expertise and track record while investing in a focused equity fund to gain optimum returns from your portfolio.

Key Takeaways

Focused equity is suitable for medium to long-term investors with a high-risk appetite and who wish to gain higher returns from a concentrated portfolio of a maximum of 30 stocks.

FAQs

Does a focused equity fund have a lock-in period?

A focused equity fund does not have a lock-in period. So, you can redeem your investments in the fund easily whenever you want within trading hours.

Are focused equity funds risky?

Focused equity funds invest a particular portion in equity stocks, so are subject to stock market risk. Also, they constitute a concentrated portfolio implying increased risk because your investments are not evenly diversified.

What is the investment horizon of a focused fund?

Focused funds should be invested from a long-term perspective of five years and beyond to earn good yields. If you are a first-time investor, you can invest in a focused equity fund, provided you are willing to stay invested for a longer period and have a higher risk appetite for maximising your returns.