Investing in mutual funds is a popular way to grow wealth. One type of mutual fund you may come across is a focused fund. The goal is to generate higher returns by concentrating on high-potential companies, rather than spreading investments across a large number of stocks.
What Are Focused Funds?
A focused fund is a type of equity mutual fund that typically holds between 20 to 30 stocks, as compared to diversified funds that may hold 50 or more. The fund manager carefully selects these stocks, aiming for long-term growth by focusing on companies they believe will perform well. The idea is to maximize returns by investing heavily in a few carefully chosen assets, rather than diluting potential gains with too many investments.
Focused funds are considered riskier because they concentrate on fewer stocks. However, the potential for higher returns is also greater if the selected stocks perform well. This type of fund is ideal for investors who have a higher risk tolerance and are looking for growth opportunities in specific sectors or companies.
Benefits of Focused Funds:
- Higher Growth Potential: With fewer stocks, focused funds aim to capitalize on companies with high growth potential.
- Expert Management: Fund managers research and select companies with strong fundamentals and good future prospects.
- Better Performance: If the selected stocks perform well, focused funds can generate higher returns than diversified funds.
Example of a Focused Fund:
An example of this fund is the Motilal Oswal Focused 25 Fund. This fund primarily invests in 25 stocks, selected based on the fund manager’s in-depth research. It focuses on large-cap companies with strong growth potential, typically from sectors like technology, financial services, and consumer goods. Investors in this fund thus hope to benefit from the strong performance of these selected stocks.
Risks of Focused Funds:
- Higher Volatility: Since these funds invest in fewer stocks, their value can fluctuate more than diversified funds.
- Sector Risk: If a fund focuses on a specific sector and that sector performs poorly, the entire fund could be negatively affected.
- Concentration Risk: A concentrated portfolio can be vulnerable if one of the stocks underperforms or faces a setback.
Conclusion:
Focused funds are a good option for investors who are willing to take on more risk in exchange for the potential for higher returns. By concentrating on a smaller number of stocks, these funds provide an opportunity to outperform the market, but they also come with higher volatility and sector risks. Always consider your risk tolerance and investment goals before investing in a focused fund.
– Ketaki Dandekar (Team Arthology)
Read more about Focused Funds here – https://www.investopedia.com/focused.asp