Focused funds, which manage concentrated portfolios of less than 30 stocks, have seen outflows in seven of the last eight months, taking out a net total of Rs 2,700 crore.
According to experts, the outflows could be the result of a combination of factors led by the poor performance of some of the largest funds amid high return expectations.
“Many of the focused funds follow a growth strategy and hence may not have performed well in the last few years. At the same time, the return expectation has increased significantly amid strong performance of midcap funds, smallcap funds and some of the sector and thematic funds. This could have caused money to move out of focused funds to other categories,” said Rushabh Desai, Founder, Rupee With Rushabh.
While around 50 per cent of the funds have outperformed the benchmark (BSE 500) in the one- and three-year periods, only 41 per cent of them have managed to generate benchmark-beating returns in the five-year period, according to data from Value Research.
The funds have returned an average of 33.7 per cent in the one-year period, compared with a 35.8 per cent rise in the BSE 500.
“Investor interest in focused funds has waned due to their recent underperformance. These funds typically thrive when precise stock selection and active management drive returns, but the recent broad-based market rally has impacted the performance of such strategies. In this environment, the concentrated nature of focused funds becomes a liability, leading to suboptimal returns,” said Vaibhav Porwal, Co-Founder, Dezerv.
Underperforming funds include some of the largest schemes in the category such as Axis MF, Mirae Asset MF and SBI MF.
They manage nearly 40 per cent of the total Rs 1.5 trillion in assets under management (AUM) with dedicated funds.
According to Melvyn Santarita, analyst and research manager at Morningstar Investment Research India, focused funds are more likely to underperform as the average weight of each stock in the portfolio is higher compared to funds like Flexicap.
“Most stocks have a weightage of 5-6 percent in the portfolio, so if some of the bets go wrong, the performance is severely affected,” he said.
Another reason, experts say, is that targeted funds are seen as a higher-risk category, given higher levels of concentration.
“Focused funds are perceived as more concentrated and therefore distribution partners may be considering taking a more diversified approach to investing when valuations are above average. More importantly, when most of the money is going into mid-market, small-market and thematic funds, the other segments have to give up market share,” said Jay Kothari, global head of international business and chief investment strategist at DSP Asset Managers.
“Concentration funds stand out in terms of risk due to limitations on holdings. This could be one of the reasons why investors are withdrawing funds. The money may be being redeployed into other, relatively safer funds,” Santarita said.
First published: August 14, 2024 | 6:40 pm IS
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