Fundamentals of Focused Equity Funds - Complete Guide 2025
Focused mutual funds are mutual funds that are concentrated portfolio of stocks, typically 30 stocks or less. In contrast to diversified equity funds that can invest in 50 to 100 stocks, focused funds do not stop short in a single company belonging to various sectors or market capitalisations. The concept is to invest the skills of the fund manager in fewer and larger stocks in which he or she believes, in the hope of outperforming broader funds.
The funds are becoming popular to Indian investors wishing to have a differentiated equity exposure in 2025. As markets become increasingly more complex and competitive, there are a growing number of people that think that properly selected focused strategies can do even better than passive index funds or even some SIP-based diversified schemes. Nevertheless, this has its own risks and factors to consider hence it is imperative to know what to expect before committing to investment.
Did you know?
In this regard the Securities and Exchange Board of India (SEBI) stipulates that focused funds have a maximum number of stocks in their portfolio (that is 30) so that they do not lose focus on their focus mandate.
Focused Equity Funds - How Does this Works?
Focused equity funds operate by reducing the number of investments to a few interests by conducting research. Fund managers evaluate the market trends, industry cycles, and the fundamental of a specific company to get a shortlist of stocks that they can think can perform over the long run. These companies may be of any industry and the large cap, mid cap and small cap ratios may differ.
The primary benefit is the opportunity to make large bets in a limited number of stocks that have good potential, which presents an opportunity to make disproportionate returns in case the choices are successful. Nevertheless, with a smaller number of holdings, in case any of the picks perform poorly or the markets become volatile, the fund is also capable of suffering significant losses.
The strategy will need professionals who will possess good research skills and a keen insight into the market forces. These funds are usually left to be run by experienced fund managers who have a history of tracking record.
Key Features or Highlights
- Invests in up to 30 companies.
- The ability to select stocks in industries and market capitalisations.
- Active style of fund management.
- Intended to make more than broad equity funds.
- Risk of increased concentration as a result of low stocks.
- Appropriate to medium- and high-risk investors.
Why Should We Invest in Focused Equity Funds in 2025
By 2025, the Indian equity markets have been undergoing swift transformation, and technology, financial and consumption were some of the areas that were performing well. A lot of investors are now aiming at coming up with methods of coming up with alpha in addition to index investing. In this case, special purpose equity funds gain interest due to the degree of conviction ideas and riding the winners effectively.
There is the possibility of these funds to capitalise on the new trends, such as the digital boom, clean energy, or new infrastructural projects. However, it is worth mentioning that market cycles may be shifted rather swiftly and big bets on erroneous horses may influence the short-run performance. This is the reason why the focused funds are ideal to investors with minimum horizon of 4-5 years and moderate risk-takers.
According to experts, to diversify risk and get the advantageous concentrated strategies, experienced investors can invest up to 10-15 per cent in focused equity schemes.
What Distinguishes Focused Equity Funds as Compared to Other Equity Funds
| Characteristic | Focused Equity Funds | Diversified Equity Funds | Sectoral/Thematic Funds |
|---|---|---|---|
| Stocks on hand | Less than 30 | 40 or more | Less than 10 to 50 or more |
| Flexibility to investment | High | High | Low (sector/theme based) |
| Risk level | Moderate-High | Moderate | High |
| Return potential | High | Moderate | High (but cyclical) |
| SEBI Mandate | 30 stocks maximum | No maximum limit | Depends on theme |
| Suitability | Experienced/Risk-on | All investors | Tactical allocations |
Thematic versus Diversified and Focused Funds
Whereas all equity funds provide exposure to stock market, focused funds restrict their investment to a few stocks. Diversified funds attempt to diversify risk by distributing investments but this in some cases causes average returns. Sectoral and thematic funds are even more dangerous because they are tied to the performance of a single industry.
Some of the popular focused funds have performed better than the large cap diversified funds in the last three years, yet their volatility was more pronounced in the periods of market corrections.
What Are the Advantages and Disadvantages of Focused Equity Funds?
Pros
- Possibility of greater returns in case of good performances by stocks selected.
- Concentrated bets indicate the confidence of fund managers.
- The capacity to choose across industries and market sizes.
- Is able to outperform the broader funds in trending markets.
Cons
- When concentration leads to a higher risk, worse stock picks are affected.
- The cycle to cycle performance may be inconsistent.
- Takes more time to hold before giving good results.
- May is weak in a down turn of the market.
Did you know?
In 2024, there are India-based focused equity funds that were able to generate above 25% annualised returns whilst the worst in the sector performed below the Nifty 50 by 7-8 percentage points.
Who Ought to Invest on Focused Equity Funds
Dedicated equity funds will suit those investors who:
- Already possess a certain experience of the equity investments.
- Comfortable with increased volatility and risks.
- Have investment horizon of five years and above.
- Interested in adding core diversified holdings with conviction-led strategies.
You can consider starting with SIPs in diversified large cap or multicap funds instead of investing in fluctuating portfolio values in case you are a first time investor or are not comfortable seeing such changes.
Who Ought Not to Think of These Funds
- Investors who require capital within a short term (less than 3 years).
- Retirement investors after regular payment.
- Those with low risk appetite.
- Individuals that panic with corrections in the market.
The Major Considerations to Make Before Investing in Focused Equity Funds
- Fund Manager Track Record: This involves examining the experience and previous track record of the manager dealing with the scheme.
- Portfolio Concentration: Examine how the choice is big, medium-sized or small firms, and audit sectoral bets.
- Consistency: Buys and sells – see the way the fund behaved in bull and bear markets.
- Expense Ratio: Increased expenses will consume returns. Compare with peer funds.
- Performance vs. Benchmark: The study risk-adjusted returns such as Sharpe or Sortino ratio.
Analysts point out that narrow funds are not to be evaluated based on the short-term spurts (less than a year) but rather based on full market cycles (5-7 years).
The Best Focused Equity Fund to Pick in 2025
There are more than 20 dedicated mutual fund schemes that are offered by major AMCs in India, which makes shortlisting a difficult task. Here’s how you can get started:
- Search funds with long-term records, and that have demonstrated higher performance than benchmarks.
- Research on existing portfolio, look at the sectoral allocations, and any significant exposures.
- Test the style of the fund manager – value, growth, or both.
- Make Total Expense Ratio (TER) competitive.
- View the latest investor communication and fund fact sheets to get the market outlook of the management.
- Consult a registered financial advisor in making your decision, particularly when setting aside a substantial amount of money.
India Taxation of Focused Equity Funds Returns
The focused equity funds are taxed as equity mutual funds. According to the existing tax regulations (revised to FY 2024-25):
- They tax gains less than a year as STCG (Short Term Capital Gains) at 15% tax rate.
- The gains of more than one year are LTCG (Long Term Capital Gains); the first lakh gain is tax free, above that, it is taxed at 10% without indexation.
Did you know?
When investing through SIPs, the individual payments will be considered as a separate investment to compute tax, and the holding period will be counted separately in relation to each SIP.
What Are the Myths of Focused Equity Funds?
-
Myth: When the concentration is higher, the returns will be higher.
Reality: Performance is determined by skills of managers and market cycles. -
Myth: Only aggressive investors ought to look at focused funds.
Fact: It can still work to the advantage of even moderate risk investors with proper allocation. -
Myth: Diversification is superior to concentration.
Fact: Diversification helps to eliminate risk, but occasionally gives an average payoff; portfolios need both strategies.
Focused Equity Funds: What Have They Done Over the Last Few Years
According to rolling returns January 2020 - December 2024:
| Period | Top Focused fund Avg Return | Top Diversified fund Avg | Nifty 50 TRI |
|---|---|---|---|
| 1 year | 22.8% | 18.4% | 17.7% |
| 3 years (CAGR) | 16.3% | 14.9% | 15.6% |
| 5 years (CAGR) | 14.7% | 13.1% | 13.9% |
The difference between the top set of focused funds and the index and the broader peers varies depending on the conditions of the market; although the top set of focused funds occasionally outperforms the index and other peers. The performance in the category is also quite varied with a big spread of returns being highly dependent on the ability of managers and the selection of stocks.
Minimal Risk - What Are the Risks Associated with Focused Equity Funds
- Concentration Risk: The lack of diversification results in increased risk in the performance of the selected stocks.
- Volatility Risk: Could experience increased NAV fluctuations than an equity diversified fund.
- Fund Manager Risk: Fund manager risk is extremely dependent on the judgment of fund manager.
- Market Risk: As in all equity plans, general market corrections also apply to these funds.
Investment in Indian Focused Equity Funds
You can invest through:
- Online platforms of the direct mutual funds or respective websites.
- Third party portals or investment applications.
- Your registered financial advisor through him.
It is a wise beginning to start with a SIP (Systematic Investment Plan) which will average cost of purchasing and minimize timing risk. Lump sum investments are more suitable when the market is correcting or long term horizon.
The financial analysts argue that it would be a good idea to look at investments in your target funds annually to determine whether they now align with your financial objectives and risk tolerance.
Focused Fund Holdings - How to Monitor and Review
- Evaluate the current performance of fund against benchmark and peer group.
- Look at recent switching of the portfolio.
- Assess risk ratios (alpha and beta and Sharpe ratio) on a quarterly basis.
- Sell or repurchase securities when the fund is underperforming consistently or when there is a change of fund manager and the performance declines.
- When you notice style drift (e.g. the fund begins to look more like a diversified fund) you should think of changing to a more specialized one.
What Are the Highest Rated Focused Equity Funds in India 2025
Examples of focused funds with good long-term performance (as of March 2025) to use in education are as follows:
| Name of Fund | 3 Year CAGR | 5 Year CAGR | TER | AUM (cr) |
|---|---|---|---|---|
| Axis Focused 25 Fund | 16.9% | 14.8% | 1.75% | 13,700 |
| SBI Focused Equity Fund | 16.6% | 14.5% | 1.72% | 22,500 |
| ICICI Prudential Focused Eq. | 15.8% | 13.9% | 1.70% | 11,800 |
| HDFC Focused 30 Fund | 14.6% | 13.3% | 1.80% | 7,900 |
Important: The performance of the past is not an assurance of future returns. Do not consider a recommendation.
TLDR or Quick Recap
- Focused equity funds concentrate their portfolio in 30 or fewer companies and offer higher returns concentrating on fewer companies.
- They are more risky and can be recommended to an experienced or moderate-aggressive investor having a 5-year perspective.
- Best added as a holding on the margin of the larger portfolio, having been researched.
- The key to selection of the right fund is track record, manager expertise, portfolio mix and cost.
- The index funds might be unstable in bad times but outperform returns.
People Also Ask
Q1: Good to invest in focused equity funds in 2025.
A1: Yes, when you are long term and have the knowledge of risks. The alpha is added by concentrating on funds that add alpha to your portfolio, but requires time to work.
Q2: Minimum investment of focused equity fund in India?
A2: The minimum SIP accepted in most funds ranges between Rs 500 -1,000 and lump sum between Rs 5,000 and above.
Q3: Are concentrated equity funds risky.
A3: They are more risky than diversified equity funds due to concentration in a small number of stocks, however, risk can be addressed through allocation and long term holding.
Q4: Are beginners allowed to invest in focused equity funds.
A4: Large cap funds or diversified mutual funds are a good place to begin when a person is starting out. When they feel comfortable, they would be able to inject concentrative funds towards greater growth potential.
Q5: What is the difference between focused funds and flexi cap funds?
A5: Flexi capital funds may invest in any market cap and hold a number of stocks as many as the manager pleases, whereas focused funds are limited to 30 companies which adds to greater concentration.
Q6: Are focused equity funds dividend-paying funds?
A6: A large number of focused funds contain a growth and an IDCW (Income Distribution cum Capital Withdrawal) option. Shareholder dividends are not fixed and are looking at profit recorded by the fund.
Sources
- SEBI Focused Fund Categorisation
- AMFI Mutual Fund Returns Data
- Value Research Mutual Fund Screener
