Diversified Funds vs Focussed Funds: Which
One Should You Choose?
Fund managers use different investment strategies
to manage mutual funds on behalf of their investors. Based on the strategy,
fund houses categorise mutual funds into different categories. We can classify
equity mutual funds into two different segments: diversified funds and focussed
funds.
Both these funds come with their merits and
demerits. In this article, we will know about diversified mutual funds and
focussed funds and see which one will suit you the best.
What is a Diversified Fund?
If we talk about diversification, especially from
an equity fund standpoint, it is the practice of investing across a variety of
industries belonging to different sectors.
Diversified Equity Funds invest in stocks of
different companies. Diversified fund is an umbrella term that includes large
cap funds, small cap funds, multi cap funds etc. Diversified funds do not have
any cap on the number of stocks the funds can invest in. Typically, a
diversified fund invests around 50 stocks.
As these funds invest in several stocks, the funds
come with minimal risk.
Multicap funds that invest in stocks across market
capitalisation such as large-cap stocks, mid-cap stocks and small-cap stocks is
a perfect example of a diversified fund. Here, the fund manager can increase or
decrease the allocation to a category based on the market outlook and reduce
overall risk.
Also, as diversified fund doesn’t invest in a particular
sector, it protects you from any downturn affecting a particular segment. The
gains from other sectors balances the losses.
With risk mitigation, the returns potential of the
diversified fund also reduces. As diversified funds invest across various
companies, it limits the percentage of allocation of a particular stock in a
fund. As a result, the stellar performance of a single or few stocks may
not generate attractive returns for the fund.
What is a Focussed Fund?
According to the SEBI’s definition of focussed
funds, these funds can invest in a maximum of 30 stocks. The fund can focus in
a particular category like large-cap or mid-cap or take a multi cap approach.
The aim of these funds is to invest in quality companies for the long-term and
deliver higher returns.
As focussed funds invest in a few stocks, the
holding of a particular stock is significantly higher than a diversified fund.
Hence, any outstanding performance of a stock can lead to higher fund
returns.
The higher returns of the fund comes with higher
risk. With higher allocation to a single stock, the poor performance of a
company can derail the fund’s returns. So, the higher returns of focussed funds
come with higher risks.
Also, you need to remember that focussed funds is
not the same as sectoral funds. Sectoral/thematic funds invest in a particular
sector and with no restrictions on the maximum number of stocks. On the other
hand, focussed funds are not restricted to a particular sector, and it caps the
maximum number of stocks at 30.
Which one should you choose?
The investment strategy of diversified mutual funds
and focussed funds is different. Hence, thesefunds are meant for different
investor categories.
If you are new to mutual fund investment or have a
small corpus to invest, diversified funds could be a better choice than focused
funds. You would be better off by taking a lesserriskto getreturns that are
more consistent.
However, if you are a seasoned investor with a
large well-diversified investment portfolio, you can look at allocating a small
percentage of your portfolio to focussed funds to get higher returns. Moreover,
you need to be okay with the fact that your fund manager can get their
investment call wrong, which may lead to losses.
Conclusion:
Diversified and focussed mutual funds are two broad
categories of equity mutual funds. Diversified funds carry lesser risk than
focussed funds. Hence, in general, it is a better option for investors. Also,
if you invest in focussed funds, diversified funds should occupy a major part
of your portfolio.
Call us to know more and suitable fund for your
investment requirement.
#niveshsimplified #fundvaliz #mutualfundsahihai #investment