Focussed Mutual Fund

Focused funds are regulated by SEBI and defined as open-ended equity schemes that:

• Can invest in up to 30 companies only
• Must allocate a minimum of 65% of their portfolio to equities
• They are multi-cap in nature, allowing investment in large-cap, mid-cap, and small-cap stocks
• Operate with greater stock-specific risk but also greater return potential

These funds enable fund managers to pursue the best possible opportunities in the market, without the constraint of adhering to a fixed number of sectors or market capitalizations.

• Concentrated Holdings: Unlike flexi-cap or large- and mid-cap funds, focused funds intentionally invest in fewer companies. This concentrated approach is designed to amplify the performance of winning bets, although it also increases exposure to individual stock risks.
• Flexibility Across Market Caps: Focused funds are not restricted by capitalization limits. A manager may invest heavily in large caps for stability or mid/small caps for growth, depending entirely on the fund's strategy and the prevailing market environment.
• High Conviction Investing: These funds represent the fund manager's strongest investment ideas, selected after in-depth analysis of fundamentals, valuations, and growth potential.
• Active Management: This fund's performance is largely dependent on the decisions and abilities of the fund manager. If the manager is skilled and supported by an efficient research team.
• Long-Term Orientation: The concentrated nature of focused funds implies that they might perform poorly over certain market periods. However, when considering a longer horizon (five years and more), the top-performing focused funds usually reward patient investors.

As of 2025, Indian equity markets are showcasing sectoral diversification, with manufacturing, infrastructure, renewable energy, and digital services driving growth. At the same time, global macroeconomic factors continue to create periodic volatility.

Focused funds can navigate such complexity by backing high-quality, long-term growth stories, rather than spreading across too many average bets.

They're also an effective tool for investors who want:

• High return potential through stock-specific alpha
• Simpler portfolios with only the best ideas
• Exposure to multi-cap strategies with more precision

• Potential for Higher Returns: Since capital is deployed into fewer, high-conviction bets, focused funds have the potential to outperform diversified funds when the manager's strategy is executed correctly.
• Sharper Portfolio Construction: Focused Funds Avoid Clutter. Instead of holding 50-70 stocks like some diversified funds, they maintain a leaner portfolio, giving each company more influence on the outcome.
• Efficient Use of Research: Every holding in a focused fund undergoes rigorous fundamental analysis, ensuring that only the strongest companies are included.
• Multi-Cap Exposure in a Single Fund: Since there are no constraints on market capitalization, investors gain access to a wide range of companies including extensive, mid-cap, and small-cap companies all in one fund.

• Higher Volatility: A concentrated portfolio implies that any few holdings that are not performing well in the market can significantly impact the overall returns.
• Stock-Specific Risk: Focused funds are more vulnerable to adverse situations that may affect specific stocks or sectors in general.
• Manager-Dependent Performance: The performance of these funds is closely tied to the capabilities of the fund manager. If their timing is poor, conviction is weak, or research is flawed, returns over time may be harmed.
• Not Suitable for Short-Term Investors: Due to their high volatility potential and dependence on long-term business cycles, focused funds are best suited for investors who are committed to the investment for at least five years.

Focused mutual funds are best suited for:

• Investors with a moderate-to-high risk appetite
• Those looking for alpha-generating strategies to supplement core diversified holdings
• Investors who trust active fund management and are comfortable with short-term volatility for long-term gains

They are ideal for investors who already have core exposure to index or diversified equity funds and are now looking to enhance their portfolio's return potential through high-conviction bets.

Taxation rules for focused funds are identical to equity mutual funds:

• Short-Term Capital Gains (STCG): 15% if units are sold within 1 year
• Long-Term Capital Gains (LTCG): 10% on gains exceeding ₹1 lakh per year after 1 year
• Dividends (IDCW Option): Taxed at your applicable income tax slab rate. TDS applies to dividend payouts exceeding ₹5,000 per year.

Top-performing focused funds over the last five years include:

• SBI Focused Equity Fund: Approximately 16.8% CAGR over 5 years
• ICICI Prudential Focused Equity Fund: Around 17.5% CAGR over 5 years
• Axis Focused 25 Fund: About 14.2% CAGR over 5 years
• Nippon India Focused Equity Fund: Nearly 19.4% CAGR over 5 years

Those funds have been highly successful, particularly during periods of market recovery and sectoral rallies. Their ability to leverage specific market sectors, such as digital transformation, private banking, and consumption, has resulted in significant outperformance.