Focused Fund
Also written Focused funds · Focused equity fund
An open-ended equity scheme holding at most 30 stocks, with at least 80% in equity, that must state where it focuses (multi, large, mid or small cap). Riskier than a diversified fund, less than a sector fund.
In plain language
A diversified equity fund might hold 60, 80 or more stocks. A focused fund deliberately holds no more than 30.
The idea is conviction: the fund manager puts more money behind fewer ideas. If those ideas are right, each one moves the NAV more. If they are wrong, each one hurts more.
That is why the workbook places focused funds between diversified funds and sector funds on its risk ladder. Concentration raises risk, but a focused fund can still spread its 30 stocks across many sectors, which a sector fund cannot.
How it works
SEBI category definition (Chapter 2):
- "An open-ended equity scheme investing in maximum 30 stocks".
- The scheme needs to mention where it intends to focus: multi cap, large cap, mid cap or small cap.
- Minimum investment in equity and equity related instruments: 80% of total assets.
Market capitalisation definitions (Box 2.2), which apply across categories:
| Category | Rank by full market capitalisation |
|---|---|
| Large cap | 1st to 100th company |
| Mid cap | 101st to 250th |
| Small cap | 251st onwards |
Risk hierarchy (Chapter 12, Illustration 12.1.5):
Diversified funds → Focused funds → Thematic funds → Sector funds (risk and potential return rise left to right).
The workbook explains: focused funds "carry higher risk than a diversified fund, due to higher concentration among smaller number of stocks. However, these are less risky than a sector fund." It also cautions that one must still evaluate the other risks a scheme takes, since concentration is only one dimension.
Residual portion: in equity categories, the residual can go into equity, money market and liquid instruments, gold and silver instruments permitted by SEBI, and InvITs, within MF Regulation ceilings.
A worked example
The schemes and figures are illustrative.
Two equity schemes each manage Rs 1,000 crore.
| Diversified large cap fund | Focused fund (large cap focus) | |
|---|---|---|
| Number of stocks | 70 | 25 |
| Average weight per stock | 100% ÷ 70 ≈ 1.4% | about 80% or more ÷ 25 ≈ 3.2% or more |
| Minimum equity | 80% in large caps | 80% in equity, max 30 stocks |
Suppose one holding falls 40% in a month.
Diversified fund: 1.4% weight × 40% fall ≈ 0.57% hit to NAV
Focused fund: 3.2% weight × 40% fall ≈ 1.28% hit to NAV
The same bad news costs the focused fund's investors more than twice as much. The reverse holds for good news.
Compliance check: a focused fund that buys a 31st stock breaches the maximum 30 stocks rule. And if its equity drops to 75% of total assets, it breaches the 80% minimum.
Choosing: an investor who wants a core equity holding might prefer the diversified fund; one comfortable with concentration might add a focused fund, while recognising that a sector fund would be riskier still.
Why NISM asks about it
Chapter 2 (Concept and Role of a Mutual Fund) sets out the SEBI category definition; Chapter 10 notes focused funds among concentration risks; Chapter 12 (Mutual Fund Scheme Selection) places focused funds in the risk hierarchy and compares them with diversified and sector funds, and its sample questions ask whether a focused fund is riskier than a diversified fund. Expect: maximum 30 stocks, 80% minimum equity, and the risk ranking.
Common exam traps
- Maximum 30 stocks, not minimum.
- 80% minimum in equity and equity related instruments.
- It must state its focus (multi, large, mid or small cap).
- Riskier than diversified, less risky than sector funds. Thematic funds sit between focused and sector funds.
- Focused is about the number of stocks; sectoral is about one sector. A focused fund may hold 30 stocks across many sectors.
- Open-ended is part of the SEBI definition.
Check yourself
1.A focused mutual fund is riskier than a diversified mutual fund. State whether true or false.
- a)True
- b)False
Show the answer
Answer: (a) True
The chapter's sixth sample question. "A FOCUSED FUND IS RISKIER THAN A DIVERSIFIED FUND", stated directly under Illustration 12.1.5, and repeated in the discussion of scheme categories: focused schemes "carry HIGHER RISK THAN A DIVERSIFIED FUND, DUE TO HIGHER CONCENTRATION AMONG SMALLER NUMBER OF STOCKS. HOWEVER, THESE ARE LESS RISKY THAN A SECTOR FUND." Carry both halves — a focused fund sits above diversified but below thematic and sector on the concentration ladder. The reason diversification helps is given in the comparison with sector funds: "the MULTI-SECTOR EXPOSURE in a diversified fund MAKES IT LESS RISKY", and in an actively managed diversified fund "the fund manager performs the role of ENSURING HIGHER EXPOSURE TO THE BETTER PERFORMING SECTORS." One caution from the same section: "different sector funds may have DIFFERENT RISK PROFILES", and concentration risk cannot be compared directly with the size risk of a diversified small-cap fund.
2.Which among the following schemes would have the lower risk of concentration?
- a)Multi-cap fund
- b)Focused fund
- c)Thematic fund
- d)Sector fund
Show the answer
Answer: (a) Multi-cap fund
The chapter's fourth sample question. Illustration 12.1.5 runs "DIVERSIFIED FUNDS – FOCUSED FUNDS – THEMATIC FUNDS – SECTOR FUNDS", with "the risk and potential return INCREASES as one moves from left to right." A multi-cap fund is a diversified fund, spreading "the investments ACROSS THE MARKET CAPITALIZATION SPECTRUM." The other three climb the ladder: a focused fund carries "HIGHER RISK than a diversified fund, DUE TO HIGHER CONCENTRATION AMONG SMALLER NUMBER OF STOCKS. However, these are LESS RISKY THAN A SECTOR FUND"; a thematic fund invests "across a specific theme, and to that extent, THEY FALL BETWEEN the diversified fund... AND sector funds"; and a sector fund is "risky because of the CONCENTRATION IN ONE SECTOR. If the sector under-performs then the scheme's returns is likely to be POOR." The chapter's summary line: "DIVERSIFICATION IS A PROTECTION AGAINST IGNORANCE. In other words, IF ONE IS NOT SURE, DIVERSIFICATION IS ALWAYS A GOOD IDEA."
3.Which scheme must hold at least 25 per cent each in large cap, mid cap and small cap stocks, and how is large cap defined?
- a)Flexi-cap Fund; large cap is the 1st to 50th company by market capitalisation
- b)Multi Cap Fund; large cap is the 1st to 100th company by full market capitalisation
- c)Large and Mid-Cap Fund; large cap is the 1st to 250th company
- d)Focused Fund; large cap is any company above ₹10,000 crore
Show the answer
Answer: (b) Multi Cap Fund; large cap is the 1st to 100th company by full market capitalisation
"Multi Cap Fund: An open-ended equity scheme investing ACROSS large cap, mid cap, small cap stocks... must have the MINIMUM INVESTMENT IN EQUITY AND EQUITY RELATED INSTRUMENTS AS 75 PERCENT of total assets", with "minimum investment in... large cap companies - 25% of total assets; mid cap companies - 25%; small cap companies - 25%." Box 2.2 defines the segments: "Large Cap: 1st-100th company in terms of FULL MARKET CAPITALIZATION; Mid Cap: 101st-250th; Small Cap: 251st company onwards" — and "the same definition applies in case of other scheme categories, too." The commonest confusion is with the Flexi-cap Fund: "minimum investment in equity and equity related assets are 65% of the total assets. This would be a DYNAMIC fund where there CAN be investment across large cap, mid cap as well as small cap stocks" — may, not must. The Large and Mid-Cap Fund requires 35% + 35%, and a Focused Fund is defined by holding a maximum of 30 stocks.
Where this is taught
Free preparation for NISM Series V-DRelated terms
- Exchange Traded FundA mutual fund scheme whose units are listed and traded on a stock exchange like a share, so you transact at live prices through the day instead of at one end-of-day NAV.
- Balanced Hybrid FundAn open-ended hybrid scheme with 40% to 60% in equity and 40% to 60% in debt, and no arbitrage allowed. It sits below the aggressive hybrid fund on the workbook's risk ladder.
- Market capitalisation bandsSEBI's rank-based bands for classifying companies by size — large cap is the 1st to 100th company, mid cap the 101st to 250th, small cap everything from the 251st onward, by full market capitalisation.
- Sector fundAn open-ended equity scheme investing at least 80% in one sector, such as banking or pharma. The riskiest step on the diversification ladder; best used tactically as a satellite holding.
- Thematic fundAn open-ended equity scheme investing at least 80% in line with a theme — infrastructure, MNCs, PSUs — spanning several sectors, and so riskier than a diversified or focused fund but less concentrated than a sector fund.
- Equity Long-Short FundAn investment strategy under a Specialized Investment Fund: at least 80% in equity, with unhedged short exposure through derivatives capped at 25%. Minimum investment Rs 10 lakh across an AMC's SIF strategies.