A mutual fund scheme that is both concentrated and over-diversified is not necessary for an investor. To acquire precisely the perfect amount of diversification, consider specialised funds. The following topics will be discussed in this article: Which should you choose: concentrated funds or diversified funds?
When it comes to investing, we’ve all heard the phrase “don’t put all your eggs in one basket.” The proverb emphasises the need of variety. While diversification is vital, it does not minimise risk beyond a certain degree. As a result, as an investor, you don’t need to worry about concentration or over-diversification. Focused funds can provide exactly the right level of diversification for investors. The following topics will be discussed in this article: Focused vs. Diversified Funds: Which Should You Choose?
How Do Focused Funds Work?
A focused fund is an open-ended equity strategy with a maximum of 30 stocks it can invest in. The strategy must specify its focus area (large, mid, small, or flexi-cap). A focused fund’s total assets must be invested in equities and equity-related products to the tune of at least 65 percent.
Focused funds usually take an agnostic approach to market capitalization, sector, and topic. Focused funds can be thought of as a concentrated version of flexi-cap funds because they invest in a maximum of 30 stocks. Although focused funds adopt a diversified strategy, diversification is limited to 30 equities, as required by SEBI’s product structure.
When is it appropriate to invest in Focused Funds?
After gaining sufficient exposure to diversified stock funds, as stated above, an investor can consider investing a portion of their portfolio in other equity mutual funds. Focused funds, sectoral funds, thematic funds, factor-based funds, and so on are examples of these. These schemes should make up no more than 20-25 percent of the overall equity mutual fund portfolio.
For reference, below is a list of specialised funds:
Various AMCs are offering 26 targeted mutual fund schemes as of April 8, 2022. Some of these are:
IIFL Focused Equity Fund IIFL Focused Equity Fund IIFL Focused Equity Fund
Focused Equity Fund of SBI
Sundaram Focused Fund is a mutual fund managed by Sundaram.
Axis Focused 25 Fund is a mutual fund that focuses on a single axis
Quantitatively oriented fund
The Nippon India Focused Equity Fund is an investment vehicle that focuses on India.
Franklin India Focused Equity Fund is an India-focused mutual fund.
ICICI Prudential Focused Equity Fund is a mutual fund managed by ICICI Prudential.
Sun Life Aditya Birla Focused Equity Fund
The Motilal Oswal Focused 25 Fund is a Motilal Oswal-managed mutual fund.
Focused funds are subject to taxation.
Focused funds must invest at least 65 percent of their total assets in stocks at all times, according to SEBI standards. As a result, targeted funds are classed as equity funds for tax purposes and are taxed appropriately.
1.Short-term capital gains (STCG) tax: If you sell your focused mutual fund units within twelve months of purchase, the capital gain is considered short-term (STCG). The short-term capital gains (STCG) tax will be imposed at a rate of 15%.
2.Long-term capital gains (LTCG) tax: If you sell your concentrated mutual fund units after a year, the capital gain will be considered long-term capital gain (LTCG). The first Long-term capital gains of more than Rs. The first lakh will be taxed at a rate of 10%.
Diversified funds are a type of mutual fund that invests in a variety of assets.
An open-ended equity fund that invests the majority of its assets in equities and equity-related products is known as a diversified equity fund. Diversified funds typically have a portfolio of 50 to 100 equities from a variety of industries. Diversification lowers the risk of a portfolio. If one set of stocks underperforms, the outperformance of other stocks compensates, and the portfolio as a whole performs well.
When is it appropriate to invest in Diversified Funds?
It is suggested that an individual begin investing in equities mutual funds that are diversified.
1.An investor can choose from active mutual fund schemes such as large, mid, small, multi, or flexi-cap funds within the diversified mutual schemes.
2.Index funds with underlying benchmarks such as the Nifty 50, Nifty Next 50, Nifty 100, Nifty Midcap 150, Nifty Smallcap 250, Nifty 500, and others are also available.
Diversified Funds are a huge topic to cover. We’ve created a category of Diversified Funds called Flexi-cap funds to make comparing Focused and Diversified Funds easier. A flexi-cap fund is an open-ended fund that invests at least 65 percent of its total assets in big, mid, and small-cap equities.
For your convenience, a list of Flexi-cap funds (a type of Diversified Fund) is provided below:
Various AMCs are offering 31 Flexi-cap mutual fund schemes as of April 8, 2022. Some of these are:
Flexi Cap Fund of Parag Parikh
Quant Flexi Cap Fund is a hedge fund that invests in quantitative data.
PGIM India Flexi Cap Fund is a mutual fund that invests in India.
UTI Flexi Cap Fund is a mutual fund that invests in a variety of
Canara Robeco Flexi Cap Fund is a mutual fund managed by Canara Robeco.
Edelweiss Flexi Cap Fund is a mutual fund that invests in a variety of assets
IDBI Flexi Cap Fund is a mutual fund that invests in a variety of
DSP Flexi Cap Fund is a mutual fund that invests in a variety of
Union Flexi Cap Fund is a mutual fund that invests in unions.
SBI Flexi Cap Fund is a mutual fund managed by SBI.
What is the difference between Focused Funds and Flexi-cap Mutual Funds? (A category of Diversified Equity) Funds
Within the diversified equity funds area, we shall compare Focused funds to Flexi-cap funds for comparison reasons. Let’s have a look at the distinctions between them now.
Who should put their money into Diversified and Focused Funds?
All stock mutual funds, whether diversified or targeted, contain some risk and are intended for individuals with a reasonable risk tolerance. However, the risk level differs depending on the type of equity mutual fund. As a result, a concentrated fund with a small number of stocks has higher volatility and risk than a diversified fund.
Returns comparison of Focused Funds vs. Flexi-cap Funds are a form of mutual fund that allows you to invest in (a type of Diversified Equity Fund)
Let’s examine the returns of the top focused funds and flexi-cap funds, both of which are part of the Diversified Equity Funds category.
Between a Focused Fund and a Diversified Fund, which should you choose?
An investor’s equity mutual fund portfolio should be divided into a core and a satellite portfolio. With diversified equities mutual fund schemes, you can allocate 75-80% of your money to the core portfolio. You can put the rest of your money into a satellite portfolio of focused funds, sectoral funds, thematic funds, factor-based funds, and so on. You may manage optimal asset allocation to diversified and concentrated funds in this way.
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