A focused fund is a fund that holds only a tiny number of bonds or stocks which are alike in some dimension. According to definition, a focus mutual fund concentrates on a small number of stocks within a small number of different sectors instead of holding a diverse or broad portfolio. These funds typically hold positions in 20-30 companies or less, unlike other funds in more than 100 companies.
According to SEBI's regulations, the focused funds can invest up to 30 stocks, with the minimum exposure of 65% of its portfolio to Equity and other equity-related securities. Focused funds can invest across the market capitalization range, i.e., large-cap, mid-cap, small-cap, and large caps. A review of a portfolio of CRISIL-classified funds focused on February 2019 revealed that 15 of the 18 funds were invested at or above 60% of their capital in large caps.
These funds are suited to those looking for fast growth through investing in a targeted portfolio over the long term and with a more risk-averse. Since a few stocks make up greater proportions in the portfolio, the performance of these stocks could dramatically impact the fund's performance (both in various ways). In short, the most aggressive investors should look at focused funds for potentially higher returns from a focused but diversified portfolio over the long term.
Understanding Focused Funds
Mutual funds are frequently advertised as a great method to diversify your portfolio of investments. Many mutual funds are made to have a stake in multiple businesses, with various pre-determined weights that save the investor the hassle of picking every security on their own. This allows investors to benefit from capital risk while minimizing the risk and volatility.
But, some investors think that diversification may also hinder the returns of various companies or sectors. While they may be profitable, not all will likely outperform similarly. If investors believe that a specific industry or sector will be more profitable within a short time, they could boost profits by concentrating their investments in the particular sector.
The Focused funds allocate their assets among a small number of highly researched securities. Though they don't get the advantages of diversification; as a result, they follow investing in the "search for quality" strategy-focused funds depending on the expertise of their research team to ensure higher than average stock selection. This means that the returns are more unpredictable. The fund is also called an "under-diversified fund" or "concentrated fund."
Taxation of Focused Funds
With at least an investment of 65% in equity, the focused funds are regarded as equity-oriented funds to be tax-efficient. This way, investors can classify the capital gains as either Short-Term Capital Gains (STCG) or Long-Term Capital Gains (LTCG) by an average holding time of 12 months. If the holding period is shorter than 12 months, the gains are classified as STCG and are taxed at 15 percent. If the period for holding is extended, LTCG is taxed at 10 percent (plus applicable surcharges and Cess) without the advantage of indexation. Capital gains are calculated by subtracting the redemption value from the amount invested.
Investors should be aware that they are exposed to a higher risk of investment because of a more focused approach since the bets chosen may not be as successful as expected. If fewer stocks are included in the portfolios, the chance of the other portfolio securities reducing the performance of one sector could be reduced. This means that investors can think of these funds as more risk-averse.
Tax rules included in the piece are intended for illustration purposes only and are being updated in line with the Finance Act 2020. Tax rates for capital gains are determined according to the tax laws in force at the time of sale or redemption, not on the investment date.
Example
- Usually, you should invest a minimum of 80% of your assets in stocks
- Normally, one invests mainly in the common stocks
- Typically, investing in 30-80 stocks
- The investment in foreign and domestic issuers
- The investment strategy is to either "growth" stocks or "value" stocks, or both
- Utilizing a fundamental analysis of variables such as the financial health and the position of its industry and economic and market conditions to choose investment opportunities
Fidelity Focused Stock Fund had an annualized yield of 10.12% at the end of April 2018, against 9.02 percent of its index, which is the Standard and Poor's 500 Index. This Fidelity Focused Stock Fund has a cost ratio of 0.57 percent.
