Equity funds are known to generate lucrative returns by investing in a basket of stocks. But, have you ever noticed that the term “basket” is often loosely defined?
Truth is, most equity funds hold 50 to 60 stocks in their portfolio on average. You might think that holding these many stocks gives equity funds the upper hand, especially when it comes to optimizing gains.
That may not always be the case. Unless the equity fund is managed correctly, holding too many stocks could mean that the risks outweigh the benefits. That’s why focused mutual funds take a different route.
What Is A Focused Mutual Fund?
A focused fund is an equity fund that invests in a select number of stocks, often between 25 to 30 but capped at the latter. Furthermore, focused funds have the freedom to invest across industries, sectors, and caps.
This gives focused funds the advantage of investing in a small number of well-researched stocks to generate lucrative returns, generally in the range of 14-16% over the long term.
At the same time, focused funds are prone to certain risks. For example, investing in a small number of stocks means that price swings can drastically affect the overall performance of the portfolio.
That said, most focused funds, although aggressive, are known to be geared towards large cap stocks. In summary, a focused fund invests in a maximum of 30 high conviction stocks to create a portfolio that can win.
Best Focused Mutual Funds In 2022
Truth be told, selecting the best focused fund to invest in for your goals may not be easy. You’ll have to do a lot of research including but not limited to the stocks that the fund holds, AMC track record, and more.
Chances are, you may not pick the right focused fund. One way to not make this mistake is to rely on high-quality financial advice like Cube users get from Wealth First.
WF has 20+ years of experience guiding high-net-worth individuals in the mutual fund industry. We’re going to give you a peek behind the curtain with the best focused funds you can invest in for 2022.
Reasons To Invest In Focused Funds?
1. Potentially High Returns
Focused funds tend to build a high conviction portfolio that’s designed to generate superior returns. Though that might not always be the case, focused funds have been known to generate as high as 19% returns.
Want to check out the full list of focused funds on Cube? Download the app!
2. Multi-Cap Strategy
Although focused funds are allocated a large chunk of their capital to large-cap stocks, they have the freedom to invest in small-cap and mid-cap stocks too.
This freedom can be used to build a portfolio that’s balanced yet has the chance to generate lucrative returns. It can also help the focused fund rebalance in case the market is experiencing above-average volatility.
3. Handpicked Stocks
As anybody who’s sat to pick stocks would tell you, it’s not easy. Focused funds allow you to access a set of handpicked stocks managed by experts, thereby reducing the effort you’d have to put in.
Explore focused funds
Risks Involved In Focused Mutual Fund Investments
Curated or otherwise, focused funds invest in stocks that rise and fall due to market-related factors. Market volatility can lead to sleepless nights if you’re investing on your own.
However, if you have an experienced advisor like Wealth First and trained financial professionals through Cube by your side, you’ll have a better chance to navigate through the volatility. Tap to know more.
2. Concentration Risk
Investing in a handful of stocks means that diversification isn’t always optimal. One stock can pull or drag the entire portfolio. That said, a well-balanced focused fund portfolio may not be prone to this risk.
3. Under Diversification
What if you buy a bunch of focused funds that have overlapping portfolios? That’s a common mistake that investors make when they invest in mutual funds. This has pitfalls.
First off, you’ll be owning similar stocks across two or more funds. At the same time, you’ll be paying an investment fee for all of the focused funds. This can eat into your profits and diversification.
Avoid this by getting handpicked recommendations here.
Taxability Of Focused Mutual Funds
Focused funds are equity funds and are taxed as such. If you sell a focused fund in less than a year, you’ll have to pay a tax on Short Term Capital Gains (STCG) of 15%.
If you sell a focused fund anytime after a year, you’ll have to pay a tax on Long Term Capital Gains (LTCG) of 10%. However, LTCG of up to ₹1 lakh is tax-free. Want to save tax? Get a custom portfolio made here.
Note: Facts & figures are true as of 12-06-2022. None of the information shared here is to be construed as investment advice. Exercise caution when investing in assets like stocks, mutual funds, alternative investments, and others.