What are Focused Equity Funds, and how do they work?

When it comes to mutual funds online, you have different investment avenues. You can opt for only an equity or debt portfolio or create a balanced portfolio with equity-debt investments combined. However, if you prefer an investment strategy that is diversified yet focused, you can opt for a focused equity mutual fund portfolio. Focused mutual funds are also a type of equity-oriented mutual funds that invest in a small variety of stocks.

Here is a quick guide about focused equity funds and how they work:

What are focused equity funds?

Focused funds are equity mutual funds that invest a minimum of 65% of the total assets in equity and equity-related securities. These mutual funds online can only have a maximum of 30 stocks in their portfolio. However, the funds can invest across market capitalizations, sectors and industries. The objective is to invest money in high conviction stocks, which can generate high returns over the medium to long term.

How do focused equity funds work?

Typically, an equity mutual funds online portfolio comprises 50 to 100 stocks, depending on the investment goal of the fund. However, in a focused equity mutual fund portfolio, there are only 30 stock investments, creating a concentrated portfolio of high performing stocks. There are no restrictions on types of stocks in focused equity funds. These funds can invest in any company of any size or industry. Therefore, a focused fund can have large-cap, mid-cap, or small-cap stocks without any limitation. Fund managers have the freedom to decide how to allocate money between different stocks.

What are the benefits of investing in focused equity funds?

  1. Potentially higher returns: A diversified equity fund invests across companies to reduce risk, which lowers the portfolio returns, especially in a polarized market with only a few stocks outperforming. Focused equity funds invest in select stocks with high conviction bets and generate higher returns.
  2. Diversified portfolio:Focused funds can invest in stocks of different market capitalizations, sectors and industries. Further, these funds can also split between company sizes as per the market, creating a diversified and flexible portfolio according to market conditions.
  3. Focused exposure:Focused mutual funds only invest in a handful of high bet stocks, which reduces risk. Fund managers spend time and effort in selecting the stocks. These in-depth efforts ensure the portfolio only invests in high performing, good value stocks, improving your chances to earn better returns than a broad portfolio.

How are focused funds taxed?

Focused funds invest at least 65% in equity and equity-related securities. As a result, the tax rules applicable to equity mutual funds also apply to focused mutual funds online. If you redeem your funds within one year, you pay a 15% short-term capital gains tax. If you hold your investment for longer than one year, you pay 10% as long-term capital gains tax (plus applicable surcharge) if your capital gains exceed Rs. 1 lakh per annum.

As an investor, you can consider investing in focused funds if you have high-risk tolerance and want high, near-to-assured returns. Further, investors with a medium to long-term investment horizon can also invest in focused equity funds.

Use the Tata Capital Moneyfy App to build a focused mutual fund portfolio.