Investor interest in focused funds on wane, pull out Rs 2,700 cr since Dec

Focused funds, which run concentrated portfolios of less than 30 stocks, have witnessed outflows in seven of the past eight months, pulling out a net of Rs 2,700 crore.

According to experts, the outflows could be a result of a mix of factors led by the underperformance of some of the larger funds amid elevated return expectations.

“Many of the focused funds follow a growth strategy and hence may have not done well in recent years. At the same time, the return expectation has gone up significantly amid strong showing by midcap, smallcap, and some of the sectoral and thematic funds. This could have resulted in money moving out of focused funds to other categories,” said Rushabh Desai, Founder, Rupee With Rushabh.

While around 50 per cent of the funds have outperformed the benchmark (BSE 500) in the one-year and three-year time frames, only 41 per cent of them have managed to deliver benchmark-beating returns in the five-year period, according to data from Value Research. 

Funds have delivered an average return of 33.7 per cent in the one-year period compared to a 35.8 per cent rise in BSE 500.

“Investor interest in focused funds has waned due to their recent underperformance. These funds typically thrive when precise stock selection and active management drives returns, but the recent broad-based market rally has impacted the performance of such strategies. In this environment, the concentrated nature of focused funds becomes a disadvantage, leading to suboptimal returns,” said Vaibhav Porwal, Co-founder, Dezerv. 

The funds underperforming include some of the largest schemes in the category like those of Axis MF, Mirae Asset MF, and SBI MF.

They manage nearly 40 per cent of the total Rs 1.5 trillion assets under management (AUM) with focused funds.

According to Melvyn Santarita, Analyst – Manager Research at Morningstar Investment Research India, focused funds have higher chances of underperforming as the average weight of each stock in the portfolio is higher compared to funds like flexicap.

“The weight of most stocks is 5-6 per cent in the portfolio. Hence, if some of the bets go wrong, performance takes a major hit,” he said.

Another reason, experts say, is that focused funds are seen as a higher risk category, given the higher concentration levels.

“The focused funds are perceived to be more concentrated and hence the distribution partners may be taking a view that one should take a more diversified approach to investing when valuations are above average. More importantly, when the bulk of the money is going into mid, small, and thematic funds, the other segments have to give up market share,” said Jay Kothari, Global Head, International Business and Lead Investment Strategist at DSP Asset Managers.

“Focus funds stand out in terms of risk due to constraints in terms of holdings. This could be one reason why investors are redeeming. The money may be getting re-deployed into other relatively safer funds,” said Santarita.