This Focused fund is a recent found love of Mutual Fund houses and now SEBI has formalized it with a separate category. All Other equity mutual funds generally hold 50-100 stocks. But this focused funds is invest in limited number of stock and focusing to deliver high returns over a long period.
Focused Fund where fund cannot keep more than 30 stocks in the portfolio. SEBI has not put any restriction on stock capitalization, so they can work as pure Multi Cap Funds. Focused fund is holds a comparatively small collection of stocks. It is focuses on a limited number stocks in a limited number of sectors, rather than holding a diversified mix of equity positions
1. Why Focused Funds were introduced? Some sectors and stocks continue to do well, and outperform others be it in a bull rally or a bear fall. Even within each sector, some stocks perform better than others while some continue to fall. This is why some investors prefer to stick to concentrated portfolios, which invest in the best ideas and large allocations give them a fighting chance to generate out-sized returns. A 2% weight to a stock that goes up by 50% in a year will not markedly impact the portfolio, but a 7% weight might. There are a quite a few funds in the industry that takes a focused approach, rather than choose a plain-vanilla diversified portfolio.
2. Time Period: For focused fund, Investment period should be more than 3 years.
3. Selection of Stock in Focused Fund: A focused category approach ensures that strict filters are used to select stocks as each stock will make contribution worthful to the fund's overall performance.Many consider concentration in a portfolio as a sign of greater conviction. For a fund manager who is pretty sure that his/her ideas will work, strict diversification can be a problem. This is where a concentrated portfolio of 25-30 stocks can do very well compared to a basket of 50-60 stocks where everybody gets much lower allocation. The reverse situation can play out as well, because concentrated bets can lose a lot of money if the ideas flop. The larger the allocation, bigger would be the losses in an unfortunate case. So clearly, these funds are riskier than your regular Multi Cap Funds.
4.Some Examples of Focused Fund: This category has relatively older funds such as DSP Focused Fund and Axis Focused 25 Fund which are more tilted towards large caps and IDFC Focused Equity Fund which is focused more towards Mid & Small Caps. And then there are new entrants after SEBI categorization such as Franklin India Focused Equity Fund (a Multi-Cap Category Fund before), Reliance Focused Equity Fund (a Small & Midcap Category Fund before) & SBI Focused Equity Fund (a Mid Cap Category Fund before) which will have to re-align their portfolios based on Focused category mandate.
So, it is still early days for the category, but it is clearly a riskier category w.r.t to peers such as Multi Cap & Large Caps due to more concentrated bets and performance could be very different among funds due to different views of Fund Managers. You can take allocation if you are convinced with the Fund Manager’s skills.