A focused fund is an equity mutual fund investing in a limited number of stocks. As per SEBI guidelines, a focused fund can invest in a maximum of 30 stocks. Other equity mutual funds typically hold 50-100 stocks. Some focused mutual funds also state their objective to focus on the large-cap or mid-cap stocks. Other funds do not specify any such category focus and follow a bottom-up stock selection investment strategy. The objective of focused funds is to deliver high returns by investing in a limited number of quality companies with growth potential.
The main aim of mutual funds is to provide optimal diversification. But beyond a limit, diversification becomes pointless and may lead to lower returns. The entire strategy of focused funds is to hit the bull’s eye with the right stocks and earn a high return. It forces the fund manager to buy material stocks. This approach helps fund managers to build stringent process to select a stock for their portfolio.
With higher returns, comes higher risk (losses) too. Too much concentration on few stocks can hit the bull’s eye or miss the target completely too. That said, accurate concentration can be a skill. The focused funds follow a top-down approach to select sectors and stocks and place calculated bets on the potential out-performers.