scorecardresearchMost focused mutual funds continue to give negative returns over the past 6 months

Most focused mutual funds continue to give negative returns over the past 6 months

Updated: 21 Apr 2022, 02:06 PM IST
TL;DR.

With portfolio comprising only 20-25 stocks, allocation of one stock is generally as high as 4 percent

Focused funds performed badly on account of poor performance by mid & small cap stocks also.

Focused funds performed badly on account of poor performance by mid & small cap stocks also.

A focused fund is a mutual fund with a small mix of stocks or bonds similar to each other in terms of a pre-defined parameter. These funds focus on a fewer number of stocks in a small number of sectors, instead of holding a diversified position across the market.

These funds have lately posted negative returns, particularly in past six months. The key reason, argue financial advisors, for this is that they have a high concentration rate of stocks, which didn’t happen to do well amid the recent market volatility.

Sridharan Sundaram, Founder and principal officer of Wealth Ladder Direct, explains lucidly, "Usually focussed funds are true to their name and are concentrated in only 20-25 stocks. If some fund manager made the wrong picks while selecting those limited number of stocks, the returns will likely fall considerably during a market correction."

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To put the things in perspective, he says, “Relying merely on 20-25 stocks equates to allocating four percent to one stock in the portfolio, which is quite a high percentage, and hence more vulnerable to market correction.”

 

Performance of focused funds as a category in past six months

Duration          Average return (%)Bottom performer (%)     Top performer (%)          
One month0.13-5.26  7.50     
Three months  -5.19-10.30 3.29     
Six months      -5.43-13.43  3.29     

(Source: Morning Star)

Another reason, he attributes, to the slide in returns for focused funds is their focus on mid and small caps. “Mid and small caps have corrected big time in the recent past. This is being reflected in the focused funds,” says Sundaram.

Fund nameSix-month return (%)
IIFL Focused Equity Fund                 -8.18
Sundaram Focused Fund                    -4.83
SBI Focused Equity Fund                   -4.89
Nippo India Focused Equity fund      -3.29
Quant Focused fund                         1.44

Usually, says Sundaram, focused funds perform well when all market categories do well. So, when the markets start to rise again, the focused funds’ performance will quickly pick up.

While sharing his opinion on the future market outlook, Mr Sundaram says inflation is triggering its spell on the market. "Markets will remain volatile for at least next two to three months. FPIs (foreign portfolio investor) are pulling out of Indian equities. Investors need to be extra cautious now. However, one can use the current correction as a good entry point but only if you want to stay invested for a long time," he says.

First Published: 21 Apr 2022, 02:06 PM IST