Are focused mutual funds worth the salt? List of the top 10 best-performing focused funds

Before we explore the top-performing focused funds, it's essential to grasp their goals and the rationale behind this mutual fund category

The popularity of focused funds is on the rise, thanks to their strategic approach to stock selection. These funds seek to achieve superior returns by concentrating their investments in a select group of stocks. However, before we explore the top-performing focused funds, it's essential to grasp their goals and the rationale behind this mutual fund category.

What are focused funds?
Focused funds are a subset of Equity Funds that invest in a restricted number of stocks, targeting Large-Cap, Mid-Cap, Small-Cap, or a combination of these categories. According to the Securities and Exchange Board of India (SEBI), these funds are limited to investing in up to 30 stocks and must allocate at least 60 per cent of their assets to equities. The strategy behind focused funds is to invest in a small pool of companies with significant growth potential, prioritising quality and potential over broad diversification. The fund managers of focused funds are selective, choosing to invest in companies they have the utmost confidence in, based on thorough research.

Characteristics of focused mutual funds

• Concentrated Portfolio: Focused mutual funds are characterized by their limited portfolio, restricted to a maximum of 30 stocks. This approach is about concentrating investments rather than spreading them across numerous assets.
• Investment Flexibility: These funds have the freedom to invest across various sectors and market capitalisations, including large, mid, and small-cap companies, akin to multi-cap mutual funds but within a more concentrated portfolio.

How do focused mutual funds work?
Focused funds operate by investing in a narrowly defined group of securities, providing targeted market exposure rather than diversification. The investments are made in a select number of securities after extensive research, with the primary objective being to maximise returns through strategic stock selection. These funds are often referred to as best-concept funds due to their focused investment approach.

List of the top-10 best-performing focused funds

*Funds are ranked according to 3-year returns. Data as of February 24, 2024.

Who should invest in focused mutual funds?

• Risk-Tolerant Investors: Given the higher risk from a concentrated number of stocks, focused funds are best suited for investors comfortable with potentially higher volatility and losses. This fund is advisable for those prepared to accept greater risk compared to diversified mutual funds.
• Experienced Investors: Those new to investing might find focused funds overly volatile in the short to medium term compared to more diversified options. Therefore, investors with some years of experience who understand the risks involved are better positioned to invest in focused funds.
• Long-Term Investors: Equity-focused funds require a minimum investment horizon of five years to truly demonstrate their potential. Investors should be ready to commit for this duration, especially since the selective bets made by these funds may take time to materialise.

Understanding these aspects of focused mutual funds can help investors decide if this type of investment aligns with their financial goals, risk tolerance, and investment timeline.