- Date : 07/04/2022
- Read: 4 mins
Focused funds can invest in a maximum of 30 stocks. They provide you with a concentrated portfolio. Hence, you should choose the best focused fund. We discuss the individual and fund parameters you should consider when selecting the best focused fund.
As of March 2022, 26 fund houses are offering focused funds. How do you choose the best focused mutual funds from among so many? This article discusses the investment strategy for selecting equity funds. But, let us first understand focused funds briefly.
What are focused funds?
A focused fund is an open-ended fund that invests in a limited number of stocks (maximum 30). The fund can invest in stocks across market capitalisation. Focused funds have a concentrated investment portfolio and may experience relatively high volatility than diversified equity funds. Also, the risk involved in a focused fund is relatively higher than in a diversified equity fund.
Focused funds have to invest a minimum of 65% of their total assets in equity and equity-related instruments. So, from a taxation point of view, focused funds are taxed as equity funds.
Choosing the best focused fund
Some of the factors to consider for choosing the best focused fund are listed below:
1) Financial goals
As a first step, you need to identify and quantify your financial goals and investment objective. Next, you need to make an investment plan for every goal, with the amount you need to invest regularly to achieve the financial goal.
2) Investment time horizon
If your investment time horizon is less than five years, you should avoid investing in the stock market or equity mutual funds. If your investment time horizon is more than five years, you should build a diversified equity mutual funds (core portfolio) and focused funds (satellite portfolio) portfolio.
3) Risk profile
Focused funds invest in a maximum of 30 stocks only and hence are suited for individuals with an aggressive risk profile. So, if you have an aggressive risk profile with a long investment time horizon, you may consider investing in focused funds. An individual’s risk profile will depend on factors such as age, risk tolerance capacity, time left for financial goals, financial liabilities (home loan and other loans), etc.
4) Tax implications
As discussed earlier, focused funds are taxed as equity funds. If an investor sells any focused fund units within 12 months of purchase, the profits will be classified as short-term capital gains (STCG). STCG tax will be levied at a flat rate of 15%.
If an investor sells any focused fund units after 12 months of purchase, the profits will be classified as long-term capital gains (LTCG). In a financial year, the first Rs 1 lakh LTCG will be exempt from tax. The incremental LTCG over Rs 1 lakh will be taxed at 10% without indexation benefit.
5) Fund manager and fund house
You should check the credentials of the focused fund manager, the other schemes that they have handled with the current AMC, and other AMCs in the past. Analyse the performance of the existing focused fund and the other schemes handled by the fund manager. Sit with the fund manager and do some research on the fund house also.
6) Expense ratio
Every scheme charges an expense ratio to recover the scheme-related expenses. The expense ratio directly impacts your returns. The general rule is: the lower the expense ratio the better, other things being equal. So, when comparing focused funds, give preference to those with a lower expense ratio. You can compare the returns of various focused funds on a website like Moneycontrol.
Best focused funds to invest in 2022
Note: The above returns are as of 04th April 2022. The returns are for direct funds with growth option. The 5-year returns are CAGR. The funds have been ranked based on 5-year performance.
When choosing the best focused fund, you must evaluate your needs and match them with the fund’s investment objectives. Evaluating your needs involves identifying your financial goals, analysing your risk profile, investment time horizon, etc. You will also need to evaluate the focused fund based on expense ratio, performance, the risks involved, fund manager, fund house, etc.
Disclaimer: This article is intended for general information purposes only and should not be construed as insurance or investment or tax or legal advice. You should separately obtain independent advice when making decisions in these areas.