Do you want to invest in a mutual fund that can give the highest returns? Are you willing to invest in a small number of stocks to beat the benchmark return? You may put your money in a focused fund that has a concentrated portfolio of a maximum of 30 stocks. The focused fund invests your money in stocks of different industries across market capitalisation. However, focused funds are a risky investment as compared to equity diversified funds that invest in multiple sectors. Should you invest in a focused fund?
What is the investment strategy of focused funds?
The focused fund invests your money in large-cap, mid-cap, or small-cap stocks of various industries without any restriction. However, the fund manager invests your money in fewer shares as compared to equity diversified funds that invest in over 50 stocks.
You may invest in a diversified equity fund to protect your investment. However, diversification beyond a point may result in lower returns as some sectors may not perform well. The fund manager of a focused fund aims to pick the right stocks that may offer the maximum return. The focus is on selecting the quality stocks and not on diversifying the portfolio.
Advantages of investing in focused funds
- Focused funds have the potential to grow your money over the long term.
- The focused fund invests your money in a concentrated portfolio. It has the potential to offer a higher return as compared to the benchmark.
- The fund manager picks the best stocks from any sector according to the market conditions. The strategy may offer higher returns as compared to most equity funds.
Disadvantages of investing in focused funds
- The focused fund invests your money in a limited number of stocks. If the fund manager selects the wrong stocks, you may lose a lot of money.
- The focused fund has a higher risk as compared to an equity diversified fund.
- You must have sound knowledge of stock markets to pick the right focused fund.
Should you buy focused funds?
Invest in focused funds only if you have higher risk tolerance. The focused fund bets on stocks that may provide a high return on investment. However, you could lose money if the stock does not perform well.
Do not invest in a focused fund if you don’t have the experience of investing in mutual funds. The focused fund is more volatile as compared to many equity-oriented funds.
You must check the portfolio of the focused fund and also the investment style of the fund manager. Invest in focused funds only if you can stay with the investment for the long-run. You must invest your money for five years or more to get an attractive return from the investment.
If you are investing a small corpus in mutual funds, you may avoid investing in the focused fund. The investment is for aggressive investors who have sound knowledge of the stock market. Do not invest in the focused fund for quick returns over a short period of time. The fund invests your money in a concentrated portfolio which may perform well over the long term. In a nutshell, avoid investing your money in the focused fund, if it does not match your investment goals and risk appetite.
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