A reader asks, “Can you please do an analysis on focused mutual funds and discuss if they are a better choice than index funds?”
What is a focused mutual fund? According to SEBI, it is an open-ended equity scheme focused on the number of stocks (maximum 30). The minimum investment in equity & equity-related instruments will be 65% of total assets. The fund house must mention “where the scheme intends to focus, viz., multi-cap, large cap, mid cap, small cap”.
This category is only about four years old as many old schemes changed their investment strategy around mid-2018. So it makes sense only to look at the trailing 1,2,3, and 4-year returns instead of rolling returns for passing judgement on this category. Both trailing and rolling returns for this category are available in our monthly mutual fund screeners. All dates are as of 1st Aug 2022.
Last year: Total number of funds 26. The number of funds that outperformed Nifty 50 TRI: 5 (direct plan funds) and 2 (regular plan funds)
They are:
- HDFC Focused 30 Fund(G)-Direct Plan
- Nippon India Focused Equity Fund(G)-Direct Plan
- IDBI Focused 30 Equity Fund(G)-Direct Plan
- Mahindra Manulife Focused Equity Yojana(G)-Direct Plan
- ICICI Pru Focused Equity Fund(G)-Direct Plan
Last two years: Total number of funds 23. The number of funds that outperformed Nifty 50 TRI: 13 (direct plan funds) and 9 (regular plan funds)
They are:
- Nippon India Focused Equity Fund(G)-Direct Plan
- HDFC Focused 30 Fund(G)-Direct Plan
- Franklin India Focused Equity Fund(G)-Direct Plan
- Quant Focused Fund(G)-Direct Plan
- Tata Focused Equity Fund(G)-Direct Plan
- IIFL Focused Equity Fund(G)-Direct Plan
- Mirae Asset Focused Fund(G)-Direct Plan
- ICICI Pru Focused Equity Fund(G)-Direct Plan
- Kotak Focused Equity Fund(G)-Direct Plan
- Union Focused Fund(G)-Direct Plan
- SBI Focused Equity Fund(G)-Direct Plan
- Sundaram Focused Fund(G)-Direct Plan
- HSBC Focused Equity Fund(G)-Direct Plan
Last three years: Total number of funds 20. The number of funds that outperformed Nifty 50 TRI: 13 (direct plan funds) and 9 (regular plan funds)
They are:
- Quant Focused Fund(G)-Direct Plan
- Mirae Asset Focused Fund(G)-Direct Plan
- IIFL Focused Equity Fund(G)-Direct Plan
- Nippon India Focused Equity Fund(G)-Direct Plan
- ICICI Pru Focused Equity Fund(G)-Direct Plan
- Sundaram Focused Fund(G)-Direct Plan
- Franklin India Focused Equity Fund(G)-Direct Plan
- HDFC Focused 30 Fund(G)-Direct Plan
- Kotak Focused Equity Fund(G)-Direct Plan
- SBI Focused Equity Fund(G)-Direct Plan
- IDFC Focused Equity Fund(G)-Direct Plan
- Baroda BNP Paribas Focused Fund(G)-Direct Plan
- IDBI Focused 30 Equity Fund(G)-Direct Plan
Last four years: Total number of funds 17. The number of funds that outperformed Nifty 50 TRI: 8 (direct plan funds) and 7 (regular plan funds)
Only three funds make the cut in all four lists.
- Nippon India Focused Equity Fund(G)-Direct Plan
- ICICI Pru Focused Equity Fund(G)-Direct Plan
- HDFC Focused 30 Fund(G)-Direct Plan
Do not make the mistake of selecting these funds on the basis of these numbers! Future performance is unknown.
Observations:
- The sample set of focused mutual funds has grown from 17 four years to 26 today. So a little less than half the category is new.
- Over 1Y and 4Y, less than 50% of funds outdid Nifty 50. The last 2Y and 3Y were better. So at the very least, one should admit that it is too early to dismiss focused funds or to approve of them. In the meantime, it is our money at stake, so the logical choice is to avoid them!
If I had to choose only between focused funds and index funds, I would choose index funds as they are the safest. I will choose a Sensex fund over Nifty just to get the 30 stocks “focused tag” (Nifty and Sensex returns do not differ by much). Recommendations are available here: Handpicked List of Mutual Funds Jul-Sep 2022 (PlumbLine)
In summary, focused funds are certainly not a better choice than index funds. It is highly likely that any given focused fund we choose (or any active fund for that matter) may or may not outperform the index in future. Index investing is a natural choice for those who do not appreciate this uncertainty. Others will have to commit money and find out how things pan out!
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