The basic tenet of investment is not to put all eggs in one basket - aim for diversification. While it is essential to reduce the overall risk of portfolio by spreading investment in different securities, but just adding more number of stocks to equity portfolio usually diminishes the incremental benefit of diversification beyond a point. In fact, too many stocks in the portfolio may dilute the benefits of performing stocks due to its lower proportion.
Focused funds, as the name suggest, concentrate only on high conviction quality stocks which have potential to create wealth in the long term. The aim is to create a winning portfolio by restricting investments to high conviction stocks with optimal diversification. Focused funds may be an apt investment avenue for investors looking for concentrated equity portfolio. Read on to understand more about the category. Investors are always advised to consult their financial advisors about these funds since the risk is moderately high.
What are Focused Funds?
As per SEBI's mandate, a focused fund can invest in a maximum of 30 stocks with a minimum exposure of 65% of the portfolio in equity and equity-related instruments. Focused funds can invest across market capitalization - i.e. large cap, mid-cap and small cap. Analysis of a portfolio of CRISIL-classified focused funds in February 2019 shows that 15 out of 18 funds invested more than 60% in large cap stocks (Source: Crisil Research as on Feb 28, 2019).
Focused funds are suitable for aggressive investors looking for high growth by investing in a concentrated portfolio in the long run and who have a relatively higher risk appetite. As few stocks have a higher proportion in the portfolio, performance of these stocks can significantly impact the fund's performance (both ways). In a nutshell, aggressive investors can consider focused funds to earn potentially higher returns from a concentrated yet optimally diversified portfolio in the long run.
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