Equity funds are widely distinguished into different groups based on several characteristics.
Some are based on the market capitalization of underlying stocks, some on sectoral equity funds while some bases on a peculiar investing strategy.
Since these funds play a major role in strategic investment it is unwise to neglect them in our portfolios.
There are certain similarities between these two types of equity funds still maintaining their unique characteristics in the portfolio.
Both these funds can be used to invest in funds across market capitalisations however they have remarkable key differences.
Let’s have a look at them one by one…
What is multi-cap equity fund?
Multi-cap equity funds are simply mutual funds that invest in companies across all market capitalization sizes.
Traditionally, multi-cap equity funds had a large-cap bias, with most holdings invested in large-cap companies.
In September 2020, the Securities and Exchange Board (SEBI) had mandated multi-cap funds to invest 25% each in large-cap, mid-cap, and small-cap companies.
This has led many multi-cap funds to sell some of their large-cap holdings and buy mid and small-cap companies to achieve SEBI’s recommended breakup.
What is focused equity fund?
Focused equity funds are also mutual funds that invest in a limited number of stocks.
As per SEBI’s guidelines, focused equity funds can invest in a maximum of 30 stocks.
The number of stocks in a focused equity fund is much lower than a typical mutual fund that can hold 50 to 100 stocks.
Like multi-cap funds, one can invest in a range of large, medium, and small-sized companies.
Focused equity funds make selective and carefully researched bets on a limited number of companies to maximize returns.
Why focused mutual funds?
Studies across Portfolio Management System suggest and support the fact that having anywhere between 10-40 stocks in your portfolio can reduce up to 90% of diversifiable risk.
Even the author of the legendary ‘The Intelligent Investor’ book, Benjamin Graham says that the ideal number of stocks in one’s portfolio must fall in the range of 10 and 30.
A number of PMSes in India (and similar services around the world) run focused strategies and they do pretty well.
With such widespread acceptance, it is futile to ignore ‘focused mutual funds’ existance.
The next immediate which would be raiding you mind should be…
Who should invest in focused mutual funds?
Focused mutual fund can be considered an aggressive addition to your portfolio.
This means that it introduces both – a potential for risk and a greater downside if things don’t go as planned.
A simplest way to understand this is comparing a typical multicap fund and a typical focused fund.
*assumption: equal allocation to each stock
**assumption: only one stock price is affected, other remain constant
While the above is a simplification, it is the reason why focused funds have a higher risk-reward profile than multicap funds.
In fact, multicap mutual funds have the option to diversify way beyond 50 stocks!
Bottomline: You should consider focused mutual funds only if you are okay with the above.
Now that we have seen who and when to invest in focused equity funds lets consider situation when …
Who should not invest in focused mutual funds?
The most important note from this blog article is to address an average mutual fund investor directly.
An average mutual fund investor is an individual who is a newbie/naïve/beginner or not well-versed with the financial markets.
Let it sink in your hearts and brains that “Focused mutual funds are definitely not for you.”
This is because if you are an average mutual fund investor and have just one equity mutual fund in your portfolio.
Yes, a single mutual fund portfolio is sufficient for investors who have small portfolios.
This single mutual fund, however, should not be a focused mutual fund.
Additionally, it should only be one of large cap, multi-cap or hybrid.
One can also consider the newly introduced large and midcap category funds.
Focused mutual funds should probably not be a part of your first mutual fund portfolio if you are new to mutual fund investing.
To understand multi-cap funds and focused equity funds let’s have a peek of key differentiating points…
- Risks
Multi-cap funds are comparatively less risky than focused equity funds due to the added advantage of diversification.
- Growth Potential
Focused equity funds offers higher potential growth if most stocks in the fund do well than Multi-cap fund.
- Fund – Manager’s opinion
In multi cap funds is treated like just another regular mutual funds, where the fund manager has to diversify the risk and pick companies of all sizes with high potential.
- While in case of Focused Equity funds, there is a need of fund manager who has a greater emphasis on skills and experience in choosing the 30 best stocks with the highest return potential.
Focused equity fund could sometimes be sector specific. Multi-cap funds range across sectors hence, less risky due to diversification.
Some of the similarities include:
- Investing In Companies of Any Sizes
Both multi-cap and focused equity funds can invest in companies of all sizes.
This is different from size-specific funds such as large-cap funds or mid-cap funds.
- Taxability
Taxation norms on multi-cap equity funds and focused equity funds are similar to that of equity funds.
Short-term capital gains (made by selling units held for less than a year) are taxed at 15%.
Long-term capital gains (made by selling units held for more than a year) are taxed at 10%.
Long-term capital gains of up to Rs. 1 lakh are tax-free.
At Monitree, we follow a holistic framework to select the best mutual funds across categories.
To know more, you can navigate through the investment page here or contact the office directly…
