Focused funds versus diversified funds

Focused funds versus diversified funds

In 2017, SEBI or the Securities and Exchange Board of India, has rationalized and categorized mutual fund schemes. This step has given rise to focused funds, which come under equity funds. Focused funds are capable of investing in up to 30 stocks.

Generally, these funds are thought to be quite volatile and rewarding when compared to the standard multi-cap funds. But what is the actual truth? To come up with the truth, we have studied in detail about focused funds and their diversified multi-cap counterparts. All these funds belonged to the same fund house with a history of at least one year.

But the data related to the focused funds are quite limited. The reason being their following of SEBI criterion from the year 2017 onwards. Although focused funds existed earlier too, they had different ideas and perspectives about their being targeted. 

Returns:

During the last year, 5 out of 11 focused funds have been capable of beating their corresponding diversified funds. If we consider three years, then only two out of five have come up as victorious against the diversifies funds. Now, this is exactly opposite to your expectations regarding focused funds. Most of the concentrated funds have been incapable of beating the diversified multi-cap funds.

Composition:

As we compared multi-cap funds and focused funds belonging to the same fund houses, we concluded, that on average, 45% of the portfolio of these funds was overlapping. While multi-cap funds have, on average, 45 to 50 stocks, the focused funds have about 23 to 30 shares.

We noticed a copious difference in the stock concentration in their portfolios. If we consider the multi-cap funds, then we will notice that for the top 10 and top 20 holdings, they are capable of making 49% and 70% of the portfolios. But if we have a look at the focused funds, then we will realize that they are capable of making around 57% and 85% of their portfolios, respectively.

Volatility:

The theory is that focused funds are more volatile than their diversified counterparts. As we studied both the funds, we concluded that this theory is correct. Over the last year, 6 out of 11 focused funds turned out to be more volatile than the diversified multi-cap funds. But when we compared the pattern for three long years, just 2 out of 5 focused funds were capable of maintaining their volatility against the diversified siblings.

Conclusion:

When we compared the diversified multi-cap funds and the focused funds, we noticed that the focused funds have more concentrated positions and lesser stocks. If the volatility level rises, then you can expect the returns to compensate. But again, we want to emphasize the fact that the above comparison was based on minimal data. So the data is not enough to support or contradict the arguments efficiently. Also, we have to accept that there is a significant difference in the conclusions of the three-year data and one-year data.

Now an investor will ask us what to do. So we would suggest him not to worry for now. It does not matter whether the fund you invested in is focused or not. You just need to focus on the selection of funds that are capable of delivering a superior level of risk adjustment performance. It has to be consistent enough in its performance. We do not prefer separating these funds as diversified or focused. Instead, according to us, all these are multi-cap funds. This would help you in the accomplishment of your goals.