Focussed fund

Most equity funds spread their money across a large number of stocks, so that no single company can hurt the fund too much if it does badly. A focussed fund does the opposite.

It holds a concentrated portfolio of securities. Rather than diversifying widely, the fund manager backs a shorter list of stocks with higher conviction. Fewer stocks means each one matters more to the fund's return, for better or worse.

SEBI's mutual fund regulations cap a focussed fund's portfolio at 30 stocks. This is the defining structural rule of the category: any equity scheme that wants to call itself 'focussed' cannot hold more names than that.

With fewer holdings, the impact of any single stock's performance on the whole fund is larger than in a widely diversified fund. The workbook flags this directly: the risk in such funds may be higher, because the extent of diversification in the portfolio is lower.

A diversified equity fund might hold 80 stocks, so a single stock falling 20% moves the whole fund by only a small fraction of a percent. A focussed fund holding the SEBI-permitted maximum of 30 stocks, with roughly equal weights, has each holding worth about 3.3% of the portfolio on average — so the same 20% fall in one stock moves the whole fund by about 0.66%, roughly twice the impact.

An investor who puts Rs 5,00,000 into a focussed fund is deliberately accepting this — betting on the fund manager's ability to pick 30 winners rather than diversify the risk of picking wrong away.

Chapter 11 (Mutual Fund), section 11.5.1 (Equity Funds), lists focussed funds among the categories of equity schemes, immediately after dividend yield funds and just before Equity Linked Savings Schemes. Expect a question naming the maximum number of stocks a focussed fund can hold, or one asking a candidate to identify a focussed fund from its concentrated-portfolio description.

• The cap is 30 stocks, not a minimum — a focussed fund can hold fewer, but never more.
• Concentration raises risk, not certainty of higher return. A focussed fund is not automatically a better performer; it is a higher-conviction, less-diversified bet.
• Do not confuse a focussed fund's concentration rule with an AMC's one value-or-contra-fund rule — those are separate SEBI product-design limits that happen to sit in the same part of the workbook.