Focused mutual funds concentrate their investments on a limited number of stocks, which aim to generate substantial returns by betting on these select shares. Such funds can be invested in a maximum of 30 stocks.
On the other hand, most other mutual funds can invest in a maximum of 100 stocks. Such stocks may belong to small-cap, mid-cap, and large-cap companies with a focus on just a few sectors.
However, focused equity funds invest in high-performing assets in a bid to make potentially higher gains. Such funds do not invest across sectors; as a result, it may not be ideal for investors who are aiming for diversification.
In addition, limiting these funds to a few stocks makes them vulnerable when it comes to market volatility.
However, focused equity funds can be suitable for those with a high-risk appetite and looking to maximise their gains. As investments in stocks are undertaken through consideration of in-depth research and assessment, focused funds may potentially provide significant returns.
When it comes to choosing investment strategies, the two factors that an investor needs to consider are risk and reward.
Generally, focused mutual funds offer the potential for higher returns, considering their focused approach. However, as stated earlier, such funds also carry a higher degree of risk, as a dip in one of these select stocks could have an adverse impact on the fund’s returns. Therefore, investors need to be careful while investing in focused funds.
Focused mutual funds have highlighted an ability to outperform their benchmark index in the past 10 years. Yet, understanding their inherent strategy and the risk involved remains crucial.
Also, prior to making any form of investment, conduct thorough research or consult a financial advisor to ensure that an investor makes the right move and is assured of better returns in the long run.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.