Focused funds surge 31%: Here's all you need to know

Best idea funds: A growing number of investors are flocking towards focused mutual funds, which pool assets in a small number of high-potential stocks. The asset base for this category surged to Rs 1.43 lakh crore in three months ended June 2024. This marked an increase of 31 per cent from a year ago, according to AMFI.

These funds are also known as 'best idea funds'. Experienced investors with money to park for five to seven years should consider them, say experts.

"Focused funds offer the potential for higher returns, but they come with higher risks. They lack diversification which means that poor performance in one or more selected stocks can impact the overall performance ," said Ravi Singh, SVP - Retail Research Religare Broking Ltd.

"These funds are the best choice for investors with a higher risk tolerance and a strong belief in the sectors or companies they are investing in," Singh added.

What are focused funds?

A focused mutual fund is designed to invest in a concentrated portfolio, typically holding 20-30 stocks or even fewer. Unlike traditional mutual funds that diversify across hundreds of companies to minimise risk, focused funds zero in on a select number of stocks that have been meticulously researched. This "best idea" approach is based on the belief that concentrated investments in high-performing sectors or companies can lead to higher returns.

Top 5 focused funds as per Groww data

360 ONE Focused Equity Fund Direct Growth

With a Rs 1,000 minimum SIP, this fund has produced annualised returns of 21.39 per cent over the past three years. As of August 21, its NAV stands at Rs 54.46.

Quant Focused Fund Direct Growth

This fund has provided 3-year annualised returns of 25.37%, with a minimum SIP amount of Rs 1,000. Its current NAV, as of August 21, is Rs 102.73.

SBI Focused Equity Fund Direct Plan Growth

A minimum SIP investment of Rs 500 is required for this fund, which has offered 3-year annualised returns of 15.69%. As of August 21, it has a NAV of Rs 367.33.

HDFC Focused 30 Fund Direct Plan Growth

This fund has provided 3-year annualised returns of 30.50%, with a minimum SIP amount of Rs 100. Its current NAV, as of August 21, is Rs 239.92.

Baroda BNP Paribas Focused Fund Direct Growth

With a Rs 500 minimum SIP, this fund has produced annualised returns of 21.49 per cent over the past three years. As of August 21, its NAV stands at Rs 25.76.

How do focused funds work?

Focused funds concentrate on a small, carefully chosen set of securities in an effort to maximise returns. Fund managers are free to invest in businesses of any size, including large, mid, and small-cap equities in a range of sectors. With the use of this technique, investors can obtain focused exposure to particular industries they predict will see strong growth in the near future.

Advantages of investing in ‘best idea funds’

Possibility of above-market returns

Focused funds invest in relatively stable and high-quality stocks. By holding a relatively low number of stocks, an investor is much more likely to see better returns from a focused fund than from a mutual fund with much more investments. Since there are fewer stocks to hold within a focused fund, the investment impact of high-performing stocks will be more significant.

Cheating diversification

On the other hand, traditional mutual funds dilute the potential returns of good investments by investing in too many sectors and companies, some of which may be duds. Focused funds help investors avoid the problems associated with overdiversifying. Instead, they focus investment on the top-performing stocks.

Expert analysis

Focused funds typically spend more time analysing and choosing stocks since they only have about 10 to 20 companies. Focused funds usually perform better than the broader market indices for a comparable period.