Are focused funds possible options for capital appreciation? Equities can be a substantial investment option if you aim to generate capital wealth over long run. The reason is that equities have a tendency to generate returns above the market’s benchmark performance. An equity-concentrated portfolio can increase the chance of achieving the results. As focused funds can have a minimum investment of 65% in equity or equity-related instruments (as per SEBI’s guidelines), we can understand the craze behind investing in focused funds. Let’s learn the benefits of focused funds.

Focused funds: a brief overview

As per SEBI guidelines, focused funds invest in equities of maximum 30 companies to create an equity-concentrated portfolio. Equities are the wealth creation tool that could potentially make this concentrated portfolio churn out better returns. Investing in these funds just got more attractive, right?

It may sound appealing, but a concentrated equity portfolio also brings a significant disadvantage, the higher risk attribute. Risks and returns always go hand-in-hand. These funds tend to be riskier than our regular equity funds. You created the portfolio focusing on the banking sector. And suddenly, the Reserve Bank of India (RBI) passed a new resolution that changed interest rates. This will heavily affect your portfolio.

The benefits of focused funds

The potential for higher returns

Generating higher returns is the primary allure of focused funds. This higher return potential is attributed to the stellar performance of the carefully chosen companies, which the fund managers expect in the future. This is how fund managers aim to capitalize by adding the best possible investment growth opportunities.

The risk-reward attribute

Higher risks, higher returns—this adage stands true in the pursuit of wealth creation. Each equity selection in the portfolio carries substantial weight in the overall performance of the fund. All selected equities bring elevated levels of risk as well. This heightened risk leads to volatility and, unfortunately, can bring potential losses if the chosen stocks perform poorly. However, with spot-on insights and the right usage of resources by the fund managers, they can bring good profits.

Strategic diversification

Portfolio diversification is the most common strategy that fund managers use to mitigate market risks. Since focused funds are inherently less diversified, fund managers have to come up with slightly different approaches. The fund managers rely on the investments spread across different sectors or themes, like sectoral equities like banks, IT industries, or thematic equities like manufacturing, to ensure diversification in the equity asset class. Hence, the fund’s performance isn’t totally reliable in a single industry. These sector/theme-wise investments can increase the diversification of your portfolio.

Conclusion

Investing in a focused fund is like a betting game. Higher returns are possible, but not without higher risks. These funds can help you with capital growth but need careful market research. Investors must think diligently before investing in these funds and ensure they will suit their financial goals.

Note: Aditya Birla Sun Life AMC Limited /Aditya Birla Sun Life Mutual Fund is not guaranteeing/offering/communicating any indicative yield/returns on investments. The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.