In total, there are 31 focused schemes offered by different mutual fund houses in the category. These schemes have generated returns of between 19 and 60 per cent in the last one year | Image: Shutterstock
Focused mutual funds, which invest in a concentrated portfolio of stocks, are gaining traction among investors with the category’s asset base growing to Rs 1.43 trillion in three months ended June 2024, marking a 31 per cent increase from a year ago.
Interestingly, some of the focused funds offered by mutual fund houses such as Invesco India Focused Fund, Mahindra Manulife Focused Fund, JM Focused Fund and HDFC Focused 30 Fund generated remarkable returns of 40-60 per cent last year, industry data showed.
Focused funds are a type of mutual fund in which the fund manager selects a concentrated portfolio of stocks, usually limited to a maximum of 30 due to regulatory restrictions.
This requires the fund manager to be highly skilled in stock picking as he needs to identify the best investment opportunities in the market without bias towards any specific market capitalization or sector.
According to data from the Association of Mutual Funds of India (AmFi), assets under management (AUM) of select funds stood at Rs 1.43 trillion in the June quarter of FY24-25, compared with Rs 1.09 trillion in the April-June quarter of FY24.
This growth highlights the attractiveness of focused funds as an alternative to portfolio management services (PMS), especially with recent tax changes making PMS less attractive due to higher costs and tax implications, said Feroze Azeez, joint managing director, Anand Rathi Wealth Ltd.
“With the increase in taxes on short- and long-term capital gains, PMS portfolios are expected to experience a decline in after-tax returns. For example, a PMS portfolio generating a pre-tax return of 14 percent could see its after-tax return fall from 11.73 percent to 11.29 percent. This change could lead to fund managers turning over portfolios less frequently, which in turn will impact returns for investors,” he added.
Focused funds follow a similar concentrated portfolio strategy, where the fund manager picks the best stocks and offers flexibility based on market capitalization. They therefore become a more attractive option for investors looking to optimize their returns.
Industry experts recommend investing in focused funds through systematic investment plans (SIPs) as a smart strategy in the current market environment of sector rotation and high valuations. Since these funds invest in a small number of stocks, SIPs can help reduce risk by spreading investments over time.
In all, there are 31 specialised schemes offered by different mutual fund houses in the category. These schemes have generated returns of between 19 and 60 per cent in the last one year.
In terms of returns, smaller funds have performed exceptionally well. The Invesco India Focused Fund delivered a remarkable return of over 60 per cent last year, while the Mahindra Manulife Focused Fund delivered a return of around 50 per cent and the JM Focused Fund offered a return of 45 per cent during the same period.
With a capital of Rs 1,552 crore as of June 2024, Mahindra Manulife Focused Fund has been a consistent performer, securing the second position over 1, 2 and 3 year periods. The fund generated returns of 50%, 32% and 26% over these periods respectively.
HDFC Focused 30 Fund achieved the first position over the 3-year period with a return of 28.63 per cent, while JM Focused Fund achieved the third position with a return of 25 per cent over the same period.
“The success of targeted funds underscores the importance of specialized fund management and strategic stock selection,” said one industry expert.
Focused funds opt for a more targeted strategy rather than the broad diversification typical of traditional mutual funds. This approach helps fund managers make investments in a carefully selected group of stocks, reflecting their strongest investment convictions.
The concentrated nature of these portfolios requires careful selection of each stock, as the fund’s performance depends largely on these choices. Although these funds have a limited number of stocks, they are structured to be sufficiently diversified to effectively manage risk.
Overall, equity mutual fund assets increased to Rs 27.6 trillion in June 2024 from Rs 17.43 trillion in June 2023.
(Only the headline and image of this report may have been reworked by Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)
First published: August 11, 2024 | 1:52 PM IS
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