Why some focused mutual funds made it to the top performing list of 2019?2 min read . Updated: 06 Jan 2020, 08:52 AM IST
- Motilal Oswal Focused 25 is another fund that made it to the list of top 10 funds
- SBI Focused Equity fund wasn't far behind at the 11th spot with a return of 16%
Focused funds were among the top performers of 2019. As per the data available on Valueresearchonline.com, three focused funds out of a total of 21 funds featured in the list of top 10 performing equity funds for the year 2019, across all equity funds in the diversified categories excluding sector and thematic funds. IIFL Focused Equity fund was the best performing fund with a return of 27.31% while DSP Focus fund was the fourth best performing fund featuring in the list with a return of 18.57%.
Motilal Oswal Focused 25 is another fund that made it to the list of top 10 funds with a return of 17.09% in 2019. SBI Focused Equity fund wasn't far behind at the 11th spot with a return of 16%.
As per Securities and Exchange Board of India (SEBI) classification, focused funds are those funds which can invest in a maximum of 30 stocks. Other than this cap, there are no other limits allowing them to take concentrated bets across stocks of various capitalisation that is large, mid and small cap.
There are 21 funds in this category with assets of around ₹46,000 crore as per Value Research Data. Currently, funds in this category are holding stocks in the range of 11 to 30 while the average number of stocks held by funds in this category is 26. Value Research doesn’t classify these funds in a separate category.
Experts believe that the rally in the equity market over the past one year is driven by select few stocks and since these funds can hold concentrated portfolio, holding the winning stocks has resulted in the out performance of these funds.
“Returns in 2019 have come from a smaller set of stocks and therefore a concentrated exposure to these stocks in certain portfolios has aided returns. Diversified portfolios have found it tougher in highly polarised markets," said Vishal Dhawan, Certified financial planner and founder, Plan Ahead Wealth Advisors.
“When there is a limited rally of stocks and funds manage to pick these stocks and take concentrated exposure in them, the result is out performance. Essentially, that is what focused funds did," said Vidya Bala, Head of research and co-founder, PrimeInvestor.in
While holding a concentrated portfolio may have bode well for focused funds, investors should know that this is not a winning strategy for all times to come: concentrated portfolio come with risks. “Investors have to be careful in picking such funds based on such performance as the risk is two fold. One the fund has to identify a new set of out performers (stocks) and hike exposure in those. Second, if the rally moves to being a more broad based one, this strategy may not necessarily outperform other categories," said Bala.
Therefore, these funds may not be for conservative investors as they carry a higher risk as they take concentrated bets compared to normal diversified equity funds, say experts. “These funds are meant for higher risk takers and need to be used with limited exposure in a portfolio. Investors need to be aware that when their bets don't work, the pain of investing in these funds will also be high," said Bala.
As equity investing is for the long-term, investors should always choose funds based on their long-term track record and the risk and return profile. If you are unable to make your own decision it is always better to take advice from a financial planner.