Often ‘the more the merrier’, but sometimes ‘the lesser the better’. This holds true while investing in Mutual Funds too. Although mutual funds are popular for offering diversification, there is a type of scheme that adopts a focused and concentrated approach too.
What are Focused Equity funds?
Focused equity funds are type of equity scheme that invests a minimum of 65% of its total assets in equity and equity instruments and maximum of 30 stocks. Focus equity funds may intend to focus on multi cap, large cap, mid cap, small cap. As focus funds invest in select stocks of maximum 30 stocks, they are typically of high conviction bets that a fund manager believes to do well in future, therefore the return potential of such funds would be relatively high over medium to long-term.
What are the advantages of Focused Equity Funds?
- Power of right focus to aid in higher alpha generation – Fund managers create a portfolio of cherry-picked and high-conviction stocks to generate higher alpha over the broader market indices over medium to long-term.
- Concentrated yet diversified portfolio – Focus equity funds focusing across the market cap will have a flexibility to invest across the market capitalisation spectrum i.e., Multi, Large, Mid and Small Caps and can also be unbiased to any particular sector or industry, this enables the fund to achieve an optimal portfolio diversification also helps in mitigating the portfolio volatility.
- Distinctly positioned to broader market indices – Focused equity funds due to its high-concentration in maximum of 30 stocks is distinctly positioned from broader market indices with potential for long-term wealth creation.
The concentrated and focused investment approach of Focused Equity Funds brings several benefits. While Focused Equity Funds are allowed to invest in a maximum of 30 stocks, diversified equity funds do not have any restrictions on number of stocks in the portfolio. Most importantly, fund managers carefully study the companies and use their experience and expertise to pick the best stock ideas that have the potential to deliver superior performance in the long-run and also take larger weights in selected stocks which may lead to positive alpha generation.
How are Focused Equity Funds taxed?
Since Focused Equity Funds invest at least 65% of their net assets in Equities and Equity-related instruments, tax rule applicable to Equity Funds are applicable. For instance, if you redeem your investment in 12 months or less, your gains on redemption will attract a short-term capital gains tax of 15%. On the other hand, if the investments are held for more than 12 months, capital gains arising out of your investments will attract long-term capital gains tax. Furthermore, long-term capital gains up to Rs. 1 lakh in a financial year are exempt from tax and beyond Rs. 1 lakh is taxed at 10% plus applicable surcharge, if any.
Whom are Focused Equity Funds suitable for?
As these funds come with relatively higher risk on account of limited number of stocks in its portfolio. An existing investor who would like to add an additional amount of risk with an expectation of generating higher return can consider investing in a focused fund. Also, investors with a medium to long investment horizon and such investors who are looking for a concentrated portfolio to complement their core equity portfolio holdings may invest in focused equity funds.
To sum it up
Focused Equity Funds are a type of Equity Funds that invest in a limited number of stocks of up to 30 stocks, thus helping you benefit potential wealth creation opportunity from their focused and concentrated approach. Such funds may be ideal for you if you are high-risk taking investor with a medium to long-term investment horizon.
An Investor Education Initiative by UTI Mutual Fund
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