Investors willing to take concentrated risks are looking at focused funds of asset management companies that invest in a maximum of 30 stocks unlike other equity funds that hold 50 to 70 stocks in the portfolio to minimise risk. However, experts say investors who are convinced with the fund manager’s stock picking ability and have a high-risk appetite should invest in such funds.
As these funds run concentrated portfolios, investors should be aware of concentration risk and avoid investing for short-term. These funds benefit from a broad-based rally and investors should not get jittery due to the interim volatility.
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In focused funds, fund managers have the flexibility to manage the fund based on their market outlook. They have to state the focus area—large-cap, multi-cap, mid-cap or small-cap and there is no restriction in terms of market capitalisation. As on March 31, there are 26 focused funds with net assets under management of Rs 98,673 crore.
Flexibility in investing
As fund managers of focused funds have the flexibility to invest across market capitalisation, it helps in generating the alpha. “This gives the manager discretion to overweight/underweight market cap categories and sectors depending on their market forecast, sectoral outlook and business cycle prediction,” says Sreeram Ramdas, vice president, Green Portfolio PMS.
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Investing in focused funds can help in portfolio diversification and the conviction of the fund manager in having a higher allocation in a set of companies can be beneficial. Harshad Chetanwala, co-founder, MyWealthGrowth.com, says the fund managers have a free hand as far as investing across market capitalisation is concerned. “With such flexibility, it may help the fund to generate additional returns. However, a lot will depend on the way the portfolio gets constructed and managed,” he says.
Concentrated bets
As focused funds are all about taking concentrated bets across sectors and themes by the fund manager, higher returns can be made depending on the selections of stocks. Being concentrated in 30 stocks may be detrimental in the short run and there will be periods where the focused fund underperforms the benchmark. Investors who are convinced with the fund manager’s stock picking ability and have a high-risk appetite should invest in such funds.
While focused funds do provide diversification to the portfolio, its return doesn’t pose a rosy picture.
Nitin Rao, head, Products and Proposition, Epsilon Money Mart, says, while it is true the fund managers do have the flexibility to invest across market capitalisation, the returns remain sub-par with very few silver liners. “The median returns of these funds over a 5-year period is 10% whereas the benchmark Nifty 500 was able to generate an 11% return during the same period. Therefore, having a diversified portfolio makes more sense as you can get decent returns with much less volatility,” he says.
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Factors to consider
Prior to investing in focused funds, make sure to choose the funds wisely based on the fund manager’s expertise and historical performance. Anil Rego, founder, Right Horizons PMS, says these funds are a concentrated portfolio with high volatility, so investors with short-term goals should avoid them. “Focused funds suit experienced investors better than new investors and those who are willing to take high risks, which is crucial.”
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One of the most important factors to consider before investing is whether these funds match your risk profile and help you in reaching your goals. Nitin Rao of Epsilon Money Mart says sometimes a few picks can take years to play out and, in the meanwhile, returns will take a toll. “Therefore, investors should make informed decisions. If your investment horizon is less than three years, concentrated funds are a strict no for you,” he says.
