Investors must be cautious when considering focused schemes: MF experts

The robust returns delivered by focused funds in recent months have attracted close to Rs 6,000 crore of investor flows in the current financial year. 
 

However, mutual fund (MF) experts warn investors from committing large funds, given the risk of concentrated bets in such schemes.
 

In a one-year period, focused schemes have delivered returns of 13 per cent, beating the category returns of large-cap schemes, which yielded 11.6 per cent in the same period.
 

“Investors must be cautious when considering focused schemes. These schemes can rise when some stocks in the portfolio see sharp gains. They also carry downside risks if one or two large concentrated bets see a price decline,” said Vidya Bala, co-founder of Primeinvestor.in.
 

In the current financial year, focused schemes have garnered close to 12 per cent of total equity flows the MF industry has received.  
 

Experts said such funds did well in the recent period because some of the mid-cap investments of these schemes saw a strong upside.

 

“This is a riskier product and investors should try and stick to funds that offer more diversification. The focused fund can be considered as a tactical investment that can give some boost to the overall equity investments,” said the chief executive of a fund house.
 

According to the norms laid down by the Securities and Exchange Board of India (Sebi), a focused scheme cannot have more than 30 stocks in its portfolio at any given time.
 

Seeing investor interest in this category, some smaller-sized fund houses are considering launching similar schemes.

However, advisors reckon that investors must check whether the fund manager has a long-term track record.
 

This is because performance of focused funds is strongly linked to the fund managers’ ability to pick the right stocks.
 

Experts say focused funds have gained traction recently, as investors have found few investment avenues that have delivered better returns than benchmark indices.
 

According to industry estimates, half of actively-managed schemes have failed to beat their benchmark indices in 2019.
 

Investors have had a much challenging time in small-and mid-caps. The one-year return delivered by mid-cap schemes is a little over three per cent while small-cap schemes have given negative returns of close to two per cent in the same period.
 

Meanwhile, large-caps have benefitted from polarisation in the markets, with the top-five Nifty gainers accounting for 46 per cent of the rally. This was triggered by cut in corporation tax in September.
 

Market participants say that polarisation can continue next year, given the growth uncertainty in various pockets of the market. MF advisors say, as a result, large cap-focused funds can continue to see strong upside.