{"id":3488,"date":"2021-08-18T05:07:53","date_gmt":"2021-08-18T05:07:53","guid":{"rendered":"https:\/\/blog.certifiedfinancialguardian.com\/?p=3488"},"modified":"2021-08-18T05:09:24","modified_gmt":"2021-08-18T05:09:24","slug":"did-focused-funds-reward-investors-handsomely-in-the-equity-market-rally","status":"publish","type":"post","link":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/2021\/08\/18\/did-focused-funds-reward-investors-handsomely-in-the-equity-market-rally\/","title":{"rendered":"Did Focused Funds Reward Investors Handsomely in the Equity Market Rally?"},"content":{"rendered":"\n

“Diversification is protection against ignorance. It makes little sense if you know what you are doing.”<\/em>-Warren Buffet<\/p>\n\n\n\n

Many equity market investors take the aforesaid statement of the legendary investor too seriously — and mostly without understanding the true meaning of it.<\/p>\n\n\n\n

Focused Funds<\/a>, which hold the mandate to hold a concentrated portfolio (maximum of 30 stocks), have witnessed an increase in folio count to 42 lakh as of July 2021 compared to 37 lakh a year ago, reveals the AMFI data. Investments have flowed into Focused Funds, and the Assets Under Management (AUM) of Focused Funds (at Rs 80,871 crore of July 31, 2021) today comprises approximately 7% of the total AUM of open-ended equity mutual funds. This goes to show, more investors are now investing in Focused Funds.<\/p>\n\n\n\n

If you have been investing in Focused Funds expecting that their conviction-oriented approach would reward you handsomely, then that is not always the case. On the contrary, due to a concentrated portfolio, the risk you are exposed to will be on a higher side. A Focused Fund would do well only when the underlying conviction-driven bets taken by its fund manager pay off and outperform the broader market.<\/p>\n\n\n\n

Graph:\u00a0Placement of Focused Funds on the risk-return spectrum<\/em><\/strong><\/p>\n\n\n\n

\"Graph\"<\/p>\n\n\n\n

Note: For illustrative purpose only
(Source: PersonalFN Research)\u00a0<\/p>\n\n\n\n

The fund manager of a Focused Fund may hold the portfolio across market capitalization — large-cap, mid-cap, small-cap — with a buy-and-hold strategy, depending on how he\/she envisages the growth potential. Under the current market conditions, a predominant number of Focused Funds maintained a multi-cap or large-cap orientation portfolio, and here’s how they have fared vis-a-vis the other sub-categories of equity-oriented mutual funds…<\/p>\n\n\n\n

Table 1: Underperformance of Focused Funds<\/em><\/strong><\/p>\n\n\n\n

\n
\n\n\t\n\t\t\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n
Category<\/strong>\n<\/td>\nReturns (Absolute %)<\/strong>\n<\/td>\nReturns (CAGR %)<\/strong>\n<\/td>\n<\/tr>\n
6 Months<\/strong>\n<\/td>\n1 Year<\/strong>\n<\/td>\n2 Years<\/strong>\n<\/td>\n3 Years<\/strong>\n<\/td>\n5 Years<\/strong>\n<\/td>\n7 Years<\/strong>\n<\/td>\n10 Years<\/strong>\n<\/td>\n<\/tr>\n
Small-cap Funds<\/a>\n<\/td>\n32.5\n<\/td>\n90.8\n<\/td>\n43.5\n<\/td>\n18.7\n<\/td>\n17.2\n<\/td>\n18.2\n<\/td>\n18.8\n<\/td>\n<\/tr>\n
Mid-cap Funds<\/a>\n<\/td>\n21.6\n<\/td>\n66.9\n<\/td>\n34.2\n<\/td>\n16.8\n<\/td>\n15.6\n<\/td>\n16.5\n<\/td>\n17.4\n<\/td>\n<\/tr>\n
Multi-cap Funds<\/a>\n<\/td>\n19.9\n<\/td>\n61.0\n<\/td>\n28.6\n<\/td>\n16.7\n<\/td>\n15.3\n<\/td>\n14.9\n<\/td>\n15.9\n<\/td>\n<\/tr>\n
Contra Funds\n<\/td>\n14.2\n<\/td>\n59.1\n<\/td>\n29.4\n<\/td>\n15.4\n<\/td>\n15.6\n<\/td>\n14.9\n<\/td>\n15.3\n<\/td>\n<\/tr>\n
Large & Mid-Cap Funds<\/a>\n<\/td>\n16.6\n<\/td>\n56.4\n<\/td>\n27.2\n<\/td>\n14.6\n<\/td>\n14.6\n<\/td>\n14.9\n<\/td>\n15.6\n<\/td>\n<\/tr>\n
Flexi-cap Funds<\/a>\n<\/td>\n13.3\n<\/td>\n50.2\n<\/td>\n24.4\n<\/td>\n14.0\n<\/td>\n14.1\n<\/td>\n13.7\n<\/td>\n14.3\n<\/td>\n<\/tr>\n
Dividend Yield Funds<\/a>\n<\/td>\n21.4\n<\/td>\n54.5\n<\/td>\n28.0\n<\/td>\n13.9\n<\/td>\n14.4\n<\/td>\n12.7\n<\/td>\n13.3\n<\/td>\n<\/tr>\n
Focused Funds<\/a>\n<\/td>\n12.1\n<\/td>\n48.7\n<\/td>\n24.4\n<\/td>\n13.4\n<\/td>\n14.1\n<\/td>\n13.7\n<\/td>\n14.4\n<\/td>\n<\/tr>\n
Large-cap Funds<\/a>\n<\/td>\n9.6\n<\/td>\n44.9\n<\/td>\n21.6\n<\/td>\n12.7\n<\/td>\n12.9\n<\/td>\n12.4\n<\/td>\n13.4\n<\/td>\n<\/tr>\n
Value Funds<\/a>\n<\/td>\n15.4\n<\/td>\n57.6\n<\/td>\n25.4\n<\/td>\n11.9\n<\/td>\n13.0\n<\/td>\n13.7\n<\/td>\n15.3\n<\/td>\n<\/tr>\n
NIFTY 500 – TRI\n<\/td>\n12.5\n<\/td>\n52.1\n<\/td>\n25.4\n<\/td>\n14.1\n<\/td>\n15.0\n<\/td>\n13.6\n<\/td>\n14.3\n<\/td>\n<\/tr>\n
NIFTY 50 – TRI\n<\/td>\n8.8\n<\/td>\n46.5\n<\/td>\n22.6\n<\/td>\n14.0\n<\/td>\n15.0\n<\/td>\n12.7\n<\/td>\n13.8\n<\/td>\n<\/tr>\n
Nifty LargeMidcap 250 Index – TRI\n<\/td>\n15.4\n<\/td>\n58.4\n<\/td>\n28.9\n<\/td>\n15.1\n<\/td>\n16.2\n<\/td>\n15.6\n<\/td>\n16.0\n<\/td>\n<\/tr>\n
Nifty Smallcap 250 – TRI\n<\/td>\n32.6\n<\/td>\n92.6\n<\/td>\n40.8\n<\/td>\n15.0\n<\/td>\n14.6\n<\/td>\n14.2\n<\/td>\n14.8\n<\/td>\n<\/tr>\n
Nifty Midcap 150 – TRI\n<\/td>\n21.4\n<\/td>\n71.0\n<\/td>\n35.2\n<\/td>\n16.6\n<\/td>\n17.5\n<\/td>\n17.9\n<\/td>\n17.6\n<\/td>\n<\/tr>\n<\/tbody><\/table><\/div>\n<\/center>\n\n\n\n

Data as of August 12, 2021
Growth Option and Direct Plan considered for evaluation.
(Source: ACE MF, PersonalFN Research) <\/p>\n\n\n\n

Over the last 12-18 months, although the overall market breadth has been strong, i.e. more stocks have advanced than declined; the small and mid-cap companies have largely driven the performance of broader markets.<\/p>\n\n\n\n

The recent underperformance of focused funds has weighed even on the 3-year compounded annual returns. As a result, focused funds have underperformed most other diversified equity-oriented categories.<\/p>\n\n\n\n

Having said that, there were times when they did well as a category. If you recall, between January 2018 and March 2020, mid and small-cap stocks had a tough time in Indian equity markets. Even in the large-cap space, only a few heavyweights stocks provided props to the leading indices; during such times focused funds have fared well.<\/p>\n\n\n\n

The equation changed ever since the pandemic broke out, Focused Funds<\/a> have underperformed compared to the other sub-categories of equity mutual funds and some to their respective benchmark index. A few Focused Funds, of course, mainly the smaller schemes with high-conviction calls on sectors and stocks backed by a sound investment strategy, have done well.<\/p>\n\n\n\n

Table 2: Report Card of Focused Funds<\/em><\/strong><\/p>\n\n\n\n

\n
\n\n\t\n\t\t\n\n\n\n\n\n\n\n\n\n\n\n\n\n
Scheme Name<\/strong>\n<\/td>\nReturns (Absolute %)<\/strong>\n<\/td>\nReturns (CAGR %)<\/strong>\n<\/td>\nAUM (Rs Crore)<\/strong>\n<\/td>\n<\/tr>\n
6 Months<\/strong>\n<\/td>\n1 Year<\/strong>\n<\/td>\n2 Years<\/strong>\n<\/td>\n3 Years<\/strong>\n<\/td>\n5 Years<\/strong>\n<\/td>\n7 Years<\/strong>\n<\/td>\n10 Years<\/strong>\n<\/td>\n<\/tr>\n
IIFL Focused Equity Fund<\/a>\n<\/td>\n15.2\n<\/td>\n56.7\n<\/td>\n32.3\n<\/td>\n21.5\n<\/td>\n17.9\n<\/td>\n–\n<\/td>\n–\n<\/td>\n2,137\n<\/td>\n<\/tr>\n
Quant Focused Fund<\/a>\n<\/td>\n25.5\n<\/td>\n61.9\n<\/td>\n31.7\n<\/td>\n17.3\n<\/td>\n15.9\n<\/td>\n17.7\n<\/td>\n18.1\n<\/td>\n34\n<\/td>\n<\/tr>\n
Principal Focused Multicap Fund<\/a>\n<\/td>\n12.7\n<\/td>\n53.1\n<\/td>\n29.2\n<\/td>\n17.1\n<\/td>\n15.6\n<\/td>\n14.1\n<\/td>\n14.8\n<\/td>\n616\n<\/td>\n<\/tr>\n
SBI Focused Equity Fund<\/a>\n<\/td>\n16.8\n<\/td>\n51.7\n<\/td>\n26.3\n<\/td>\n16.5\n<\/td>\n16.8\n<\/td>\n16.6\n<\/td>\n17.3\n<\/td>\n17,847\n<\/td>\n<\/tr>\n
Franklin India Focused Equity Fund<\/a>\n<\/td>\n13.7\n<\/td>\n65.7\n<\/td>\n25.1\n<\/td>\n15.2\n<\/td>\n14.4\n<\/td>\n15.4\n<\/td>\n18.0\n<\/td>\n7,549\n<\/td>\n<\/tr>\n
ICICI Pru Focused Equity Fund<\/a>\n<\/td>\n15.5\n<\/td>\n50.6\n<\/td>\n27.2\n<\/td>\n15.0\n<\/td>\n13.5\n<\/td>\n12.2\n<\/td>\n13.9\n<\/td>\n1,879\n<\/td>\n<\/tr>\n
Nippon India Focused Equity<\/a>\n<\/td>\n11.6\n<\/td>\n64.3\n<\/td>\n29.4\n<\/td>\n14.8\n<\/td>\n14.4\n<\/td>\n15.6\n<\/td>\n17.3\n<\/td>\n5,427\n<\/td>\n<\/tr>\n
Axis Focused 25 Fund<\/a>\n<\/td>\n9.2\n<\/td>\n47.9\n<\/td>\n24.0\n<\/td>\n13.7\n<\/td>\n17.1\n<\/td>\n16.5\n<\/td>\n–\n<\/td>\n17,853\n<\/td>\n<\/tr>\n
Motilal Oswal Focused 25 Fund<\/a>\n<\/td>\n5.3\n<\/td>\n41.6\n<\/td>\n23.4\n<\/td>\n13.4\n<\/td>\n14.2\n<\/td>\n14.1\n<\/td>\n–\n<\/td>\n1,745\n<\/td>\n<\/tr>\n
Aditya Birla SL Focused Equity Fund<\/a>\n<\/td>\n10.2\n<\/td>\n45.4\n<\/td>\n22.7\n<\/td>\n13.3\n<\/td>\n12.9\n<\/td>\n12.9\n<\/td>\n15.0\n<\/td>\n4,968\n<\/td>\n<\/tr>\n
NIFTY 500 – TRI\n<\/td>\n12.5\n<\/td>\n52.1\n<\/td>\n25.4\n<\/td>\n14.1\n<\/td>\n15.0\n<\/td>\n13.6\n<\/td>\n14.3\n<\/td>\n–\n<\/td>\n<\/tr>\n
NIFTY 50 – TRI\n<\/td>\n8.8\n<\/td>\n46.5\n<\/td>\n22.6\n<\/td>\n14.0\n<\/td>\n15.0\n<\/td>\n12.7\n<\/td>\n13.8\n<\/td>\n–\n<\/td>\n<\/tr>\n<\/tbody><\/table><\/div>\n<\/center>\n\n\n\n

Data as of August 12, 2021
Growth Option and Direct Plan considered.
(Source: ACE MF, PersonalFN Research) <\/p>\n\n\n\n

IIFL Focused Equity Fund<\/a> for example by holding over 50% in large-cap stocks, over 15% in mid-caps, and another 15% in small-caps has delivered stellar returns over the 3-year and 5-year periods. It has fared well across a host of quantitative and qualitative parameters.<\/p>\n\n\n\n

Similarly, the Principal Focused Multicap Fund<\/a> by holding around 35% in large-caps, 15% in mid-caps, and 29% in small caps, has displayed an appealing performance.<\/p>\n\n\n\n

SBI Focused Equity Fund<\/a> by investing nearly 9% of its assets in foreign equities (as of July 31, 2021)—into tech companies such as Alphabet Inc and Nvidia Corporation—as well domestic equities across capitalisation has adequately compensated its investors.<\/p>\n\n\n\n

Should you invest in Focused Funds?<\/strong><\/p>\n\n\n\n

A point to note is, a Focused Fund will have its share of cyclicality depending on the kind of securities it holds in the portfolio.<\/p>\n\n\n\n

Diversification and concentration are two different investing approaches. While the former reduces risk and optimises return, the latter increases the risk along with the chance of potential returns.<\/p>\n\n\n\n

Bear in mind, a Focused Fund due to a concentrated portfolio will expose you to higher risk. Hence, only if you have a higher risk tolerance and investment and an investment time horizon of at least 5 years, you may consider amongst the best Focused Funds<\/a>.<\/p>\n\n\n\n

When you are adding a Focused Fund to your mutual fund portfolio, do not commit the following mistakes:<\/p>\n\n\n\n