Want concentrated portfolio? Go for Focused MFs

If you are an investor who wants their portfolio to be concentrated in a few shares rather than being widely diversified, you can consider investing in Focused Mutual Funds. These are funds that invest in selected shares.

According to SEBI guidelines, Focused Mutual Funds can invest a maximum of 30 shares. Similarly, at least 65% of their total assets should be invested in equity, which means shares and equity-related instruments.

How does a focused mutual fund work? 

In a general equity funds, there can be anywhere from 50 to 100 shares. However, focused funds can only invest in shares of 30 companies. However, they have the flexibility to choose companies of any size or sector within those 30 shares, such as large-cap, mid-cap, or small-cap. They can also choose to focus on a specific market cap segment if they wish.

On the other hand, large-cap funds are required to invest at least 80% of their total assets in large-cap equities and equity-related instruments. There is no limit to the number of shares they can hold

In a diversified equity fund, investments are made in various types of companies, which helps to reduce risk. However, such funds often yield lower returns, especially when only a few selected shares are performing well in the market. On the other hand, focused funds hold only 30 selected shares. As a result, the fund manager invests in high-conviction shares, which are shares that the fund manager has strong confidence in, believing that they will perform well.

How much will be the return
Let’s take a look at the kind of returns that focused funds can generate. Focused mutual funds have provided excellent average returns over the years. For example, in one year, they have given a return of 17%, in three years, a return of 30%, and in five years, a return of 13%. This means that the returns of these funds are quite good compared to many other funds.

Let us look at taxes

Focused mutual funds are subject to taxes similar to equity mutual funds. If you redeem your units within one year, you will be liable to pay short-term capital gains tax. Regardless of your tax bracket, you will have to pay tax at a flat rate of 15%, along with a 4% cess.

Similarly, if you sell your units after one year or more, you will be liable to pay long-term capital gains tax. Long-term capital gains up to Rs 1 lakh are exempt from tax. However, for long-term capital gains exceeding Rs 1 lakh, you will be required to pay tax at a flat rate of 10%, along with a 4% cess. There is no benefit of indexation available in this case.

Should you invest in these funds?
In the context of investment, it is important to consider various factors before making any decision. In the world of investments, it is commonly advised not to keep all your eggs in one basket. However, focused mutual funds are an exception to this practice. Despite this, investing in focused mutual funds is considered good because it has the potential for good returns.

Financial experts suggest that focused funds are suitable for aggressive investors who are willing to take on a slightly higher level of risk. Such investments come with various risks because they fall under equity mutual funds, meaning your money is invested in shares. Therefore, before making a final decision on investment, it is important to understand all potential outcomes and conduct thorough research.

In reality, investing in focused mutual funds is better suited for experienced investors rather than novice investors. This is because experienced investors are more comfortable with higher-risk investments, which is crucial in the case of focused funds.

Additionally, this type of investment is more suitable for investors with a time horizon of five to seven years or longer.

Focused equity mutual funds can be quite volatile. If you still have any doubts regarding investing in them, you can seek the assistance of a financial advisor.

(Disclaimer: Stocks recommendations by experts or brokerages are their own and not those of the website or its management. Money9.com advises readers to check with certified experts before taking any investment decisions.)