Focused funds are a category of mutual fund investment that comprises a smaller variety in stocks. With this investment scheme, the funds are concentrated on limited variation from only a few sectors, instead of a diverse mixture of different equity positions.
These funds mostly hold their positions in roughly 20-30 companies or less, while other funds hold positions in over 100 companies.
These funds are also known as “best idea funds” owing to their mandate of choosing a limited number of companies for purchasing stocks. The principal aim of these funds is to deliver maximum returns by investing in high performing assets.
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One of the principal benefits of investing in ordinary mutual funds is to promote diversity in equity investments. Most mutual funds invest in a large number of companies that have pre-determined weights to save investors from the hassle of selecting each security. Now, while this diversification helps investors to maximise their returns while minimising risks and volatility, on the flip side, they can also present certain drawbacks.
For instance, when investments are spread across various sectors and companies, the returns from them can also get limited because not all companies can outperform simultaneously.
The primary purpose of focused mutual funds is to allocate their holdings across a restricted number of carefully researched equity and debt funds. Even though these funds do not offer the advantages that come with the diversification of funds, they bank on the benefits that come with careful research for selecting stocks.
Thus, returns from these funds are considered to be more volatile. They are riskier than the mutual funds that invest in a large number of stocks but can also deliver higher returns than them. They are also alternatively known as “concentrated funds” or “under-diversified funds”.
The taxation on these funds is similar to that of the tax implications of mutual funds. For instance, these funds can invest in tax-saving equity funds, non-tax saving equity funds, debt funds, SIP, etc. for a limited number of companies. The tax implication on each of these investments is as follows –
The focused equity funds are liable to be taxed according to their short and long term capital gains. The long term capital gains or LTCG of the equity funds are liable to be taxed at the rate of 10% if they exceed the amount of Rs. 1 Lakh. Now, the tax-saving equity funds come with a lock-in period of 36 months, putting all the gains under long-term. Thus, they are known as tax-saving equity funds.
The short term capital gains or STCG are taxed at the rate of 15% if the units are redeemed before the completion of 1 year.
Long Term Capital Gains from debt funds are taxable at 20% post-indexation. Indexation involves factoring in the rise in inflation during the period ranging from the purchase of the funds to their sales.
Focused equity fund investments are usually for veteran investors and individuals with a high-risk appetite. Since these funds are considered to be more volatile, it is best for investors looking for safe investment options to refrain from investing in it.
However, despite the risks they present, these funds are expected to gain more traction in the future. With a promise of higher returns than other mutual funds, they can help investors maximise the gains from their investments.
Additionally, since these funds only invest in several carefully selected securities, they are much more effective in bringing high returns to investors.
Fund managers engaged in selecting companies for investment research them thoroughly before choosing ones with the capability to provide maximum returns. The in-depth assessments of the companies proceed to benefit the investors to quite an extent.
Even though they are high-risk investments, they can provide maximum returns. With focused mutual funds, investors can maximise their capital gains more effectively.
Since mutual funds do not segregate companies and sectors, they can limit the returns by investing in stocks that do not perform well. However, with the concentrated funds, the investment is limited to the stocks of selective companies, thus negating the limitation of mutual funds.
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