Focus on Focused Equity Funds

THE YEAR 2020 has been a roller coaster ride, especially for investors in the equity markets. The year began with euphoria as Indian benchmark indices scaled new heights. However, the spread of the Covid-19 pandemic brought an abrupt end to the party. The subsequent weeks witnessed sharp fall in these indices. But the tide turned again quickly, with markets showing a sharp recovery since the lows touched in March.

The situation makes it difficult for an average investor to decide what to do and what not to do. The sharp recovery, led by some selected high-quality stocks across the spectrum make many people sit back and think that the same stocks were available at a steep discount just a couple of months back. The quality of those stocks and the companies was never in question hence an experienced and skilled investor or a fund manager would have doubled down on those stocks in such a period.

That being said, such ups and downs are part of market cycles and hence it is good to be prepared for the next round of opportunity. One way to do that is by investing in Focused Equity Funds. Let us understand how this category can help you.

What is a Focused Fund?

Focused Funds are a category of equity funds as defined by the Securities and Exchange Board of India. As per the market regulator’s categorisation, these funds portfolio can hold up to a maximum of 30 stocks. The portfolios of this type of fund largely tend to have a multi-cap approach.

From an investor point of view, one way of looking at any fund is where it fits in the risk-reward spectrum. Some funds come with high risk while some others come with a relatively lower risk. One way in which risk goes up or down is through diversification. Accordingly, a large-cap equity fund could aim to reduce risk by investing in over 50 stocks. Similarly, a sectoral fund would invest only in a handful names in a targeted sector, thereby increasing concentration risk.

The Focused Equity Funds hit a sweet spot between the two categories explained above. So while the portfolio of such a fund will be a little concentrated, it will not be very concentrated to take the risk to dangerous levels. At the same time, the diversification will not be so wide that the gains become miniscule. In other words, these funds are concentrated yet diversified!

Is it a good time to invest in Focused Equity Funds?

As the sharp recovery of the markets is already indicating, quality businesses and their stocks will continue to perform. However, there could be phases where this type of fund may witness a temporary blip in performance. However, the recovery is also expected to be equally sharp.

That being said, uncertainties still remain as global and local economies continue to reel under the impact of the spread of Covid-19. As a result, in the near term several companies across sectors will be impacted by the disruption brought about by the virus. In the light of this, it makes absolute sense in placing your faith in high quality businesses. For a lay investor, this can be easily achieved through investing in Focused Equity Fund which aims to invest in good quality businesses across the spectrum and is market capitalisation agnostic.

Picking a winner

There are several offerings from various fund houses in this category. However, if one looks at the consistency in fund performance across market cycle, there is a fund which stands out of the pack and is ICICI Prudential Focused Equity Fund.

The performance of the fund can be easily gauged on how the fund performed over the last six months—a time when markets were at its volatile best. As on August 17, the fund returns stood at 7% vis-à-vis the peer group return at -6%. The numbers are similar for a three-month and one-year periods as well, indicating significant out-performance compared to its peers.

What also makes this fund special is the methodology the fund house uses to pick stocks which are to be a part of the portfolio. All the stocks selected by the fund manager have to be market leaders, or have a strong balance sheet, or are low-cost producer sin their area of speciality or are having an attractive valuation vis-à-vis its potential. Such an organised approach ensures that the selection remains largely on the side of the impeccable. Moreover, it is a multi-cap focused fund, thereby, not restricting itself to only large or popular names.

If an investor wishes to partake in the India growth story and gain from the potential of the Indian economy, investing in a Focused Equity Fund like ICICI Prudential Focused Equity Fund can be a good starting point.

Author is consultant at Nila Investment & Services.