Should you focus on focused funds?

India Infoline News Service | Mumbai | October 02, 2017 13:18 IST

Focused funds are funds that adopt an investment strategy that is focused on particular sector(s) or market capitalisation. Such focused approach is opposite to the diversification strategy that diversified funds adopt. So, if diversification is a risk-mitigating strategy, the focused approach is a consciously adopted strategy that is comparatively risky. But since the risk is higher, the expectations of returns are commensurately higher. In short, focused funds are concentrated bets with expectations of higher returns.

The focus funds may choose to invest in only those sector(s) that are expected to perform well in the medium to long term or these funds may invest in large-cap, mid-cap or small-cap stocks that are expected to do well in a given period of time of, say, five to ten years.

The focused funds usually adopt a top-down approach in selecting stocks for investment. If it is a sectoral fund, it zeroes in on sectors that are expected to do well going forward. The expectations about sectoral performance is based on market/economic cycles as not all sectors do well during the various phases of the market/economic cycle. Once the promising sectors are identified, the fund manager then identifies the stocks within that sector that are expected to benefit the most from the market/economic upturn. The stock selection is based on various parameters, including market share, company’s financial performance, management bandwidth, etc. This way, the fund manager zeroes in on the stocks that qualify for investment. If the fund choses to focus on market cap, select stocks from the universe of large, mid, or small caps are chosen for investment. The stocks are selected based on parameters financial performance, market share, etc.

Since focused funds take concentrated bets, these are risky propositions suitable for investors with high risk appetite and having higher expectations of returns. The low risk or risk-averse investors should avoid such focused funds and instead go for diversified funds or debt funds.