Focused mutual funds are an attractive way to maximize your capital gains more effectively. They are better-researched investment options. While investing in these funds, fund managers perform in-depth research to select companies that may provide maximum returns. It makes focused mutual funds a go-to choice for investors seeking high returns. But then they involve high-risk potential as well. So, it is wise to understand the various factors associated with these funds before investing your hard-earned money in them.
What are Focused Mutual Funds?
Focused mutual funds are equity funds that pursue a potent investment strategy. These funds have a limited number of holdings compared to more diversified funds. Instead of spreading investments across a wide range of securities, focused mutual funds typically invest in a smaller number of carefully selected securities.
Since focused mutual funds invest in high-conviction shares or assets, the chances of earning returns are high. As per SEBI guidelines, these funds can hold anywhere from 20 to 30 stocks. However, the exact number may vary. The good thing is that they are not limited to just one market segment, meaning they can invest in large-cap, mid-cap, and small-cap stocks.
The primary objective is to select companies or stocks that the fund manager believes have strong growth potential. By limiting investment in a smaller number of holdings and focusing on high-conviction stocks, focused mutual funds aim to generate higher returns for investors. This strategy may, however, be riskier than more diversified funds, depending on how the stocks you purchase perform over time. If any of the chosen investments perform poorly, the overall performance of the fund can be impacted significantly. Focused mutual funds are managed by professional fund managers who perform thorough research and analysis to identify better growth opportunities.
Tax Implications on Focused Mutual Funds
Focused mutual funds are taxed similarly to other equity funds. If you sell your funds one year after holding them, the profit will be considered long-term capital gains and taxed at 10%. It applies only if your total gains for the year exceed Rs 1 lakh. However, if you retain your stocks for less than a year and sell them within this period, you will be liable to pay a 15% tax on the proceeds, known as short-term capital gains.
To whom are focused mutual funds suitable?
Focused funds are not suitable for everyone. Here is who should invest in them:
Investors with a high-risk tolerance
Focused funds carry a high risk potential as they invest in a limited number of stocks in their portfolio. Fund managers bet on the stocks they believe will generate considerable returns. But, this concentration may lead to substantial loss with only one of the bets going wrong. So, only those who can take risks higher than diversified mutual funds should invest in them.
Focused funds are not ideal for you if you are new to the stock market. That is because these funds can be more volatile than multi-cap funds in the short to medium term.
Investors with a minimum of 5 years of investment horizon
Since focused funds are equity funds, you should give them at least 5 years to gain their true potential. You can invest in these funds if you wait for the time mentioned.
To conclude, focused mutual funds are equity funds that invest in a limited number of selected stocks to generate high returns for the investor. Investors willing to take on higher risk in pursuit of higher returns may consider investing in focused mutual funds. However, it’s crucial to carefully assess the fund manager’s track record, investment strategy, and the level of risk you are comfortable with before investing in any mutual fund, including focused funds. Diversification is a vital aspect of investing, and it may be prudent to have a well-diversified portfolio that includes a mix of different types of funds to mitigate risk.
Frequently Asked Questions
What are the advantages of investing in focused mutual funds?
Focused mutual funds come with several benefits. Some of them are as follows:
- High potential returns: Focused funds invest only in high-conviction stocks that the fund manager believes will deliver substantial returns in the long run.
- Diversification across company sizes: Focused mutual funds are open to invest in companies with any market capitalization. That means they can invest in small-cap, mid-cap, and large-cap companies.
- Exposure to handpicked Stocks: Fund managers do a lot of research before selecting stocks. This in-depth assessment of companies across sectors and market capitalization help add best-of-the-breed stocks to the portfolio, ensuring you earn maximum returns.
Is a focused fund better than a diversified equity fund?
Both the funds have different investment goals. While a focused fund aims to give highest possible returns by investing in a selected number of stocks, a diversified equity fund invests in multiple sectors to provide equity exposure. Although the former offers high potential returns, it carries high risks too. On the other hand, the latter involves reduced risks. Which fund is better depends on your investment goals and risk tolerance.
Do focused funds have a lock-in period?
No, focused mutual funds do not have a lock-in period, meaning you can redeem them anytime you want.
How long should I hold my focused fund investments?
Focused funds best suited for a long-term horizon. So, staying invested for at least five years might help you get high returns.
Can I invest in focused funds through SIP?
Yes, you can. Focused mutual funds allow you to start a Systematic Investment Plan (SIP). They give you the flexibility to select the frequency and the amount you want to invest.