Focused Mutual Funds: Meaning, Advantages & More

Focus is a powerful tool to fetch extraordinary results. When the focus is concentrated over a limited spectrum, it can produce incomparable outcomes.

Focused mutual funds utilize the power of focus by investing in a select number of companies, setting them apart from their more diversified counterparts. Let’s understand more about focused funds through this article!

What Are Focused Funds?

Various traditional mutual funds invest in a highly diversified portfolio consisting of up to 100 holdings. This obviously helps in minimizing the risk profile, but on the flip side, it sometimes limits the potential to generate higher returns.

In contrast to this philosophy, focused funds harness the power of concentration by investing in a select and carefully curated number of companies, often limited to 20 to 30.

Thus, focused funds are vulnerable to volatility, pose more risk & have the potential to generate better returns than traditional mutual funds.

How Do Focused Funds Work

Fund managers of focused funds aim to deliver higher returns than traditional mutual funds. They invest in a concentrated basket of 20-30 stock holdings of best-performing assets.

Fund managers conduct in-depth research to find out investment opportunities with high growth potential. Once the research & analysis is done, they filter out the best options to assemble a concentrated portfolio having only 20-30 holdings.

Best Performing Focused Funds (Examples)

The first factor investors investigate is the past performance of mutual funds. It is one of the crucial factors in choosing a suitable mutual fund scheme. The list below comprises the best performing focused funds based on past 5-year performance.

Advantages Of Focused Funds

Let’s talk about some advantages of focused funds that other mutual funds may lack.

• Having a limited portfolio, focused funds are easy to handle and enable managers to make quick decisions.
• Focused funds only need research to find the best investment opportunities, rebalancing does not require much effort, making them relatively cost-efficient.
• By concentrating on a select group of stocks, focused funds hold the potential to outperform broader diversified funds.
• Due to the small number of holdings, investors can easily understand the composition of the portfolio & make wise investment decisions.

Disadvantages and Considerations

While the advantages discussed above are compelling, it is essential to recognise that focused funds come with their own set of risks.

1. Higher Volatility

Due to the limited number of holdings, fluctuations and changes in the performance of individual stocks can lead to amplified swings in the fund’s value. Hence, focused funds tend to be more volatile than traditional funds.

2. Managerial Risk

Fund managers of focused funds bet on their best ideas & investors bet on managers’ expertise. If managers fail to identify winning stocks and time the market effectively, it can adversely affect the fund’s performance.

3. Individual Stock Risk

An adversely performing individual stock can significantly shake the performance chart. If this happens with more than one stock, it can drag down the entire portfolio’s returns.

4. Lack Of Diversification

Focused fund by their nature lacks diversification. This lack of diversification can lead to higher risk as diversification is a risk management strategy to help reduce exposure to individual risks.

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